Federal Drug Price Negotiation: Implications for Medicare Part D

Federal Drug Price Negotiation:
Implications for Medicare Part D
Updated April 19, 2007
Jim Hahn
Health Economist
Domestic Social Policy Division

Federal Drug Price Negotiation:
Implications for Medicare Part D
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

In troduction ......................................................1
Conceptual Framework for Federal Involvement in
Determining Drug Prices and Costs................................2
Statutory Mandates............................................2
Price Ceilings.................................................2
Reference Pricing..............................................2
Competitive Acquisition/Bidding.................................2
Bargaining and Negotiation......................................3
Information, Persuasion, and Other Influence........................3
Federally Determined Drug Prices and Costs in Practice...................4
Department of Veterans Affairs...................................4
Federal ceiling price (FCP)..................................4
Federal supply schedule (FSS)................................5
Blanket Purchasing Agreements/Performance-based
Incentive Agreements..................................5
National Standardization Contracts............................5
The VA Experience and Medicare Part D.......................6
Medicaid ....................................................7
Federal Upper Limit (FUL)..................................8
Rebates ..................................................8
The Medicaid Experience and Medicare Part D..................9
Consequences of Increased Federal Involvement in
the Determination of Drug Prices and Costs........................10
Ability to Achieve Discounts....................................10
Drug Availability for Beneficiaries...............................12
Innovation and New Drug Development...........................13
Impact on Other Sectors of the Pharmaceutical Industry...............16
Effect on Drug Prices in Other Markets............................16
Recent Legislative Activity.........................................17
H.R. 4......................................................17
S. 3........................................................18

Federal Drug Price Negotiations:
Implications for Medicare Part D
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. The MMA establishes that Medicare beneficiaries
will receive the prescription drug benefit through private organizations, typically
insurers or similar risk-bearing organizations, that sponsor prescription drug plans
(PDPs) or Medicare Advantage managed care plans that offer the prescription drug
benefit (MA-PDs). 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.1 The Medicare
drug plans (or their agents) negotiate prices with the drug manufacturers. The
framework created by the law emphasizes competition among the Medicare drug
plans to obtain price discounts. The Medicare drug plans have incentive to provide
the drug benefit to beneficiaries as efficiently as possible while simultaneously
attracting enrollees through low premiums and cost-sharing requirements.
The Democratic party included “Affordable Health Care” as one of the “Six for
‘06" initiatives. As part of this effort, the House passed H.R. 4 on January 12, 2007,
a bill that requires the Secretary of HHS to negotiate prescription drug prices for
Medicare beneficiaries. As of this writing, the Senate Finance Committee has notth
reported a prescription drug negotiation bill in the 110 Congress.
This report discusses what it means for the federal government to “negotiate”
drug prices under existing public programs,2 the arguments for and against such
activities, and some implications for the pharmaceutical industry, Medicare
beneficiaries, and others if similar federal involvement were to occur on behalf of the
Medicare Part D program.

1 Section 1860D (i) reads, “NONINTERFERENCE. — In order to promote competition
under this part and in carrying out this part, the Secretary — (1) may not interfere with the
negotiations between drug manufacturers and pharmacies and PDP sponsors; and (2) may
not require a particular formulary or institute a price structure for the reimbursement of
covered Part D drugs.” The conference report adds that “Conferees expect PDPs to
negotiate price concessions directly with manufacturers” (H.Rept. 108-391, p. 461).
2 Many of the federal government’s activities regarding the pricing of prescription drugs for
public programs would not be characterized as negotiations, where the parties are engaged
in a process to determine terms of mutual agreement.

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. A few rely primarily on the power
of government to dictate an outcome, such as imposing statutory mandates and
setting administered prices. 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. Some of these methods are currently employed by
federal government programs (see below), while others have been adopted by
governments in other countries.3 Many of the methods are used together.
Statutory Mandates
Through statutory mandates, the government could set the reimbursement level
or the price that the government would pay for each drug, or require that
pharmaceutical manufacturers provide a predetermined discount to government
purchasers. The federal ceiling price and federal upper limits under the Medicaid
program are examples statutorily mandated discounts. (See discussion below.)
Price Ceilings
The government can set the maximum reimbursement rate for drugs by
establishing a price ceiling; drug prices could be less than the ceiling, but not more.
The federal ceiling price also falls in this category.
Reference Pricing
Under a reference pricing system, drug reimbursement rates are not directly
fixed by the government but are tied through a predetermined manner to another
measure that may be dynamic. The reference might be an average price for a group
or class of drugs, the average price for a payer or group of payers, or the cost of an
alternative treatment. Medicaid’s federal upper limit prices and the federal supply
schedule both use reference pricing. (See discussion below.)
Competitive Acquisition/Bidding
The government can also solicit and receive bids through a competitive
acquisition program, where interested parties (pharmaceutical manufacturers) submit
confidential bids that include the prices the company is willing to provide for its
product(s). The government would then select the winning bid(s) and award

3 For more information about drug pricing in other countries, see CRS Report RL33781,
Pharmaceutical Costs: An International Comparison of Government Policies, by Gretchen
A. Jacobson.

Competitive bidding programs, also known as reverse auctions, are already used
as the basis for calculating the national average bid amount for the Part D program
and for the setting of payment amounts for durable medical equipment (DME)
covered under the Medicare program. In describing the DME competitive acquisition
program, the Centers for Medicare and Medicaid Services (CMS) states that
“competitive bidding provides a way to harness marketplace dynamics to create
incentives for suppliers to provide quality items and services in an efficient manner
and at reasonable cost.”4 The MMA also included a provision to establish a
competitive bidding demonstration for Medicare managed care beginning in 2010.
Bargaining and Negotiation
The typical formulation of a bargaining or negotiation process involves a mutual
discussion and arrangement of the terms of a transaction or agreement. In contrast to
a competitive acquisition process where most of the power rests with the buyer,
bargaining and negotiation can be more dynamic for each party. The outcome of the
process will depend in part on the relative strength of each party’s position;
monopolists (as the sole provider) or monopsonists (as the only buyer) will have
more bargaining power when facing providers or buyers who are but one of many.
Information, Persuasion, and Other Influence
A range of activities that might affect prescription drug prices are currently not
available to the Secretary because of the noninterference provision. These include
activities that would fall under the scope of explicit and implicit authorities provided
in the Medicare statute, but that might face legal challenges if currently attempted by
the Secretary, on the basis that they could be construed as “interfer[ing] with the
negotiations between drug manufacturers and pharmacies and PDP sponsors,”
“requir[ing] a particular formulary,” or “instituting a price structure.”
A critical criterion for an efficient market is that buyers and sellers be informed
decision-makers. When buyers and sellers have widely disparate levels of
information about the market and the transactions, the asymmetry could result in
market inefficiency or breakdowns. Through the encouragement, sponsorship, and
dissemination of research on the safety and comparative effectiveness of drugs, the
Secretary may be able to provide more information about the market that could be
used by consumers, health plans, and drug manufacturers in their decisions.
However, increased transparency may have the unintended consequence of providing
negotiators with the opportunity to collude if too much information is revealed about
the results of existing price negotiations.
Without the noninterference clause, the Secretary may be able to exert influence
over the drug price negotiation process through mass communications or through
targeted persuasion. Whether the activity involves the spotlight of the “bully pulpit,”
“jawboning,” or highlighted public scrutiny, the effectiveness of these efforts would

4 CMS Overview, Competitive Acquisition for Durable Medical Equipment, Prosthetics,
Orthotics, and Supplies (DMEPOS). See [http://www.cms.hhs.gov/CompetitiveAcqfor

depend on the persuasive power of the Secretary or public pressure in addition to the
merits of the arguments, combined with the ability or inclination of the
organization(s) targeted to resist such pressure or to accede to the influence.
Federally Determined Drug Prices
and Costs in Practice
The federal government has a track record of active involvement in the
determination of drug prices through the experience of the Department of Veterans
Affairs in obtaining discounts for VA beneficiaries and through the Medicaid
program in obtaining rebates from pharmaceutical manufacturers for states.
Department of Veterans Affairs
The VA obtains prescription drugs at discount through several mechanisms,
including negotiated contracts and statutory discounts. The Veterans Health Care Act
of 1992 (P.L. 102-585) requires the Secretary of Veterans Affairs to enter into Master
Agreements, under which manufacturers must offer their covered drugs to the Federal
Supply Schedule and also report non-Federal Average Manufacturing Prices (AMP)
to the Secretary that are used to establish annual federal ceiling prices. In support of
this function, the VA also undertakes many other activities typically associated with
pharmacy benefit managers (PBMs) in the private sector, including formulary5
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 incentive6
agreements, or (4) the national standardization contracts.
Federal ceiling price (FCP). Since pharmaceutical manufacturers have an
interest in having their products sold to federal purchasers, almost all FDA approved
drugs are included in the list of “covered drugs.” Therefore, for these drugs, the VA
receives at least a 24% discount off the non-federal average manufacturer price.7 The
FCPs amount to maximum pricing canopies that apply to purchases by the

5 Pharmacy benefit managers (PBMs) are companies that administer prescription drug
benefits for health care plans. Administrative services include adjudicating claims and
managing costs. In addition to formulary management, PBMs typically provide and manage
networks of pharmacies willing to accept negotiated discounts on drug prices and dispensing
fees and may encourage the use of mail-service pharmacies as a cost reduction technique.
Clinical services include drug utilization review to prevent potentially dangerous drug
6 Much of the information about VA drug pricing was obtained in a briefing for CRS staff
by the Pharmacy Benefits Management Strategic Healthcare Group, Department of Veterans
Affairs, December 12, 2006.
7 38 U.S.C. § 8126(a)(2).

Department of Defense (DOD), the Public Health Service (including the Indian
Health Service), and the Coast Guard, in addition to Veterans Affairs.
Federal supply schedule (FSS). FSS prices are the lowest prices that
manufacturers charge their most-favored nonfederal customers under comparable
terms and conditions. These prices are sometimes below the Federal Ceiling Price but
not always. The FSS is maintained by the VA’s National Acquisition Center (NAC)
and is available to all federal purchasers. Effective January 1, 2007, all FSS drug8
prices include a 0.25 percent fee to finance VA’s National Acquisition Center.
Pharmaceutical manufacturers have a strong incentive to have their products
included on the FSS because drug manufacturers can participate in the Medicaid
program and receive Medicaid reimbursement for their drugs only if the
manufacturers sign a Master Agreement and Pharmaceutical Pricing Agreement with
the VA. This requires the manufacturers to offer all their covered drugs to the FSS
at prices no higher than FCPs.9 In practice, almost all FDA-approved drugs are
included on the FSS. FSS contracts also include a blanket purchasing agreement that
allows the VA to negotiate additional discounts.
Blanket Purchasing Agreements/Performance-based Incentive
Agreements. These contracts can be initiated by either the VA or by
pharmaceutical manufacturers and produce an additional 5 to 15% off FSS.
Typically, the BPAs include performance thresholds that result in discounts if the VA
meets and maintains the threshold of use specified in the BPA for the manufacturer’s
National Standardization Contracts. These contracts typically produce the
greatest discounts (from 10 to 60% off FSS) and are negotiated for individual drugs
in closed classes on the VA national formulary. The VA is able to obtain favorable10
prices for these drugs through competitively bid contracts. Most of VA’s contracts
are for generic drugs. According to the GAO, generic drugs are easier to contract for
because these products are already known to be chemically and therapeutically alike,
while there is more difficulty in gaining clinical agreement on the therapeutic11
equivalence of competing brand name drugs. However, VA has successfully
negotiated contracts for non-generic drugs in several drug classes using clinical
evidence to outline the requirements of the contract.
The VA also obtains an additional discount through its contracts with drug
distributors. These organizations, also called wholesalers or prime vendors, purchase
the drugs from the manufacturers and deliver them to VA facilities. As of June 2004,

8 Prior to January 1, 2007, the fee was 0.5%.
9 38 U.S.C. § 8126(a)(4).
10 The VA selects from among confidential bids submitted by pharmaceutical manufacturers
and announces the winning bid. Thus, the process more resembles a round of silent bids
rather than a negotiation through which each party bargains with offers and counteroffers.
11 VA and DOD Health Care: Factors Contributing to Reduced Pharmacy Costs and
Continuing Challenges, GAO-02-969T, July 22, 2002.

the VA contract with the prime vendor provides for an additional 5% discount from
the lowest of the four prices described above.
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. Initially, the noninterference clause would need to be
repealed. However, repealing the noninterference clause may not, in itself, be
sufficient to lead to federally negotiated prices. The current HHS Secretary is
reported to have stated that he does not want the power to negotiate and does not
believe that he would be able to “do better than an efficient market.”12 In response,
some reports suggest that legislative proposals would also include a mandate for the
Secretary to actively negotiate drug prices.
One option for any forthcoming legislation might be to omit detail or specifics.
An aide to the incoming Speaker is reported to have stated that Congress does not
need “to hammer out all the details. There are a lot of smart people in the
Administration, including the Secretary, who can look at how we’re buying drugs ...
and figure out the best way of negotiating better prices with drug companies.”13
Should the authority for the Secretary of HHS follow that given to the Secretary
of the VA in negotiating drug prices, there is still uncertainty as to whether the
activities of HHS will replicate the activities of the VA or whether they would
produce similar results. There are substantial differences between Medicare and VA
that draw into question whether one experience could be indicative of the other. The
VA is a direct provider of care, and has its own health care facilities. As a result, the
VA has a national formulary as well as its own warehouses. The VA, through its
health care system, is the purchaser of prescription drugs. In contrast, the Medicare
program is an insurer that pays for care that is delivered to covered beneficiaries in
a myriad of sites. Under the new Part D, which relies on prescription drug plans
(PDPs) or Medicare Advantage managed care plans offering a prescription drug
benefit (MA-PDs) to provide the drug benefit, Medicare is one step further removed
in its relationship with the beneficiary.
Cost-sharing is quite different for Medicare beneficiaries compared with VA
beneficiaries, with incentives that might lead to corresponding differences in
behavior. The VA charges veterans in certain income and eligibility categories an
$8 copay for each 30-day-or-less supply of outpatient medication. Also, the VA does
not have annual deductible requirements for beneficiaries.14 As a result, there is no
financial incentive for the beneficiary to prefer one drug over another. The Institute

12 Pear, R., “Power Shift in Congress Revives Health Debate,” New York Times, Jan. 2,


13 Pear, op. cit.
14 Some higher-priority veterans (Groups 2 - 6) have annual co-payment caps of $960 in
2006. There are no copay caps for veterans in the lowest-priority groups consisting of
higher-income veterans (Groups 7 and 8). For additional information, refer to the U.S.
Department of Veteran Affairs, “Medicare Part D and VA Prescription Drug Benefits
Frequently Asked Questions (FAQs),” accessible at [http://www.va.gov/healtheligibility/
Library/ FAQs /MedicareDFAQ.asp#vacharge].

of Medicine (IOM) found no adverse health care effects among VA beneficiaries as
a result of encouraging providers to use the drugs on the formulary.15 In contrast,
Medicare Part D plans have created more tiers in their Medicare offerings than they
have for their non-Medicare business, and instituted varied types of drug utilization
management, including step therapy, prior authorization, and quantity limits.16 These
financial incentives are aimed toward influencing the choice of drugs by covered
Medicare beneficiaries as well as cost-containment.
The VA devotes significant efforts toward the development of its formulary.17
About 2% of the drug classes on VA’s national formulary are designated closed or
preferred. For closed classes, VA providers must prescribe and pharmacies must
dispense the selected drug, although case-by-case exceptions are allowed. In
preferred classes, VA providers and pharmacies are encouraged to prescribe and
dispense the preferred drug, but may substitute other drugs in the same class on the
formulary without obtaining an exception. These efforts have been successful for the
VA, but the implications for Medicare are unclear. Whether CMS would undertake
a similar effort and manage the formulary as strictly is uncertain.
Finally, the VA relies substantially on dispensing prescription drugs by mail.
About three-quarters of the total prescriptions are processed and distributed through
the system of seven Consolidated Mail Outpatient Pharmacies (CMOP). Medicare
may not be able to achieve a similarly high degree of consolidation through its many
private plans.
While coverage of outpatient prescription drugs is optional for state Medicaid
programs, all states covered outpatient prescription drugs for at least some Medicaid
beneficiaries and well over half of the states covered outpatient drugs for all
Medicaid beneficiaries in 2006.18 States have the flexibility to set payment rates for
all Medicaid-covered drug products as long as each state’s payments for Medicaid
prescription drugs do not exceed the lower of (1) its estimated acquisition cost (for
the drug itself) plus a dispensing fee (for the professional services in filling and

15 Blumenthal, D., and Herdman, R., eds., Description and Analysis of the VA National
Formulary, IOM, Division of Health Care Services, VA Pharmacy Formulary Analysis
Committee (Washington, DC: National Academy Press, 2000).
16 Step therapy typically requires the use of a more cost-effective drug before filling a
prescription for a less cost-effective drug, as determined by the insurer.
17 Over the course of several years, the VA has undergone a transition from numerous local
formularies to the adoption of a single national formulary. Prior to 2001, each of the 173
medical centers had its own formulary. In 2001, the VA abolished the local formularies and
adopted 22 regional formularies, one for each Veterans Integrated Service Network (VISN).
In 2007, the VA is to abolish the regional formularies in favor of the single national
18 While all states provide outpatient prescription drug coverage for the categorically needy,
not all states extend this coverage to the medically needy Medicaid beneficiaries. Most
states also cover some over-the-counter (OTC) medications. For more information, see CRS
Report RL30726, Prescription Drug Coverage Under Medicaid, by Jean Hearne.

dispensing the prescription), or (2) the provider’s usual and customary charge to the
public for the drug.19 In addition, the federal share of payments for those drugs
available from multiple sources is subject to a federal upper reimbursement limit
(FUL).20 As a result, the “prices” of prescription drugs as paid by Medicaid programs
are determined in a manner different from the price of drugs in most other settings.
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. The methodology
and basis of the reimbursements changed beginning January 1, 2007, but the
underlying concept remains the same. Until January 1, 2007, federal reimbursements
for multiple-source drugs were subject to a FUL calculation tied to the average
wholesale price (AWP). The FUL is a measure developed by CMS for use by state
Medicaid programs in reimbursing drugs that have at least three generic equivalents.
The FUL was no more than 150% of the AWP for the least costly therapeutic
For drugs not subject to a FUL, including most single-source drugs (where there
is only one FDA-approved product available for that active ingredient, dosage form,
route of administratino, and strength) and drugs for which there are fewer than three
equivalents, most states base their calculations for drug reimbursement on the
estimated acquisition cost (EAC), typically the AWP less a percentage discount.21
Beginning January 1, 2007, as a result of the Deficit Reduction Act of 2005
(P.L. 109-171), the AWP will no longer be used as the basis for calculating the FUL.
While the AWP is meant to reflect the average price at which wholesalers sell a
product to retail pharmacies, the AWP is not defined in law or regulation, and as a
result, the OIG found that the AWPs used by states to calculate Medicaid drug
reimbursement rates were often higher than the prices retail pharmacies pay to
purchase the drugs.22 Instead, the FUL now will be calculated to equal 250% of the
“average manufacturer price” (AMP), the average price at which manufacturers sell
a drug product to wholesalers. This data is reported to CMS by manufacturers.
Rebates. In principle, the Medicaid program obtains prescription drugs at the
“best price” available from drug manufacturers. As a condition for reimbursement
under Medicaid, the Omnibus Budget Reconciliation Act of 1990 (OBRA 1990, P.L.
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. The best price calculation is based on
discounts provided to any purchaser, excluding the Department of Veterans Affairs

19 Office of Inspector General, HHS, Medicaid Drug Price Comparison: Average Sales
Price to Average Wholesale Price, OEI-03-05-00200, June 2005.
20 Social Security Act Sec. 1927. [42 U.S.C. 1396r-8]
21 Office of Inspector General, HHS, Medicaid Pharmacy — Additional Analyses of the
Actual Acquisition Cost of Prescription Drug Products, A-06-02-00041.
22 Office of Inspector General, HHS, Variations in State Medicaid Drug Prices, OEI-05-02-


(and on behalf of the Department of Defense, the Indian Health Service, and the
Public Health Service), state pharmaceutical assistance programs, any depot prices
and single award contract prices, as defined by the Secretary, of any agency of the
federal government, and Medicare Part D plans. Data on prescription drug prices are
reported to the Secretary, and rebates are calculated to ensure that Medicaid pays the
lowest price. In return for entering into agreements with the Secretary, state Medicaid
programs are required to cover the drugs marketed by those manufacturers.23 In
2003, there were reported to have been more than 550 manufacturers participating
in the Medicaid drug rebate program. In 2004, federal rebates amounted to 22% of
total Medicaid spending on prescription drugs before rebates.24
The Medicaid Experience and Medicare Part D. The cost-saving
mechanisms and experiences of the Medicaid program differ significantly from those
of the VA, but also hold lessons for the Medicare program. First, the Medicaid
program obtains significant discounts through the FUL and rebate programs that are
de facto mandatory. Cost savings are obtained through statutory authority with little
or no bargaining involved, and minimum percentage discounts are specified in
statute. The Medicare Part D program is not currently structured for the federal
government to impose similar discounts or to establish administered prices for drugs,
nor for price negotiations regarding prescription drugs. The Medicare program does
collect information about rebates from Part D plans, but has not used the data for
purposes of obtaining lower drug prices from the plans.
Second, in contrast to the explicit prohibition in the non-interference provision
against federally established formularies for Medicare beneficiaries, states are
allowed to establish “open” formularies for beneficiaries not enrolled in Medicaid25
managed care plans. All drugs offered by manufacturers with a drug rebate
agreement must be covered, and all drugs must be available through a review process
unless they are on the list of excluded categories. In addition, states are permitted to
subject to prior authorization any covered outpatient drug.26 Using this authority,
some states have instituted prior authorization programs using preferred drug lists,
requiring that non-preferred drugs be subject to prior authorization. Litigation over
states’ use of preferred drug lists has occurred; however, courts have rejected
arguments that Medicaid preferred drug lists are in essence formularies that do not27
meet the requirements of the Medicaid statute. In upholding the use of preferred

23 States are not required to cover drugs in excluded categories. For details, see 42 U.S.C.


24 Hearne, op. cit., Table 4, p. 14.
25 Medicaid managed care plans are allowed to have their own formulary.
26 42 U.S.C. 1396r-8(d)(1)(A).
27 Pharmaceutical Research and Manufacturers of America v. Thompson, 362 F.3d 817
(D.C. Cir. 2004) (Michigan’s preferred drug list held not a de facto formulary under
Medicaid statute since none of the drugs on the list were excluded from coverage under the
state’s Medicaid program), Pharmaceutical Research and Manufacturers of America v.th
Meadows, 304 F.3d 1197 (11 Cir. 2002) (upholding a Florida prior authorization program
using a preferred drug list, citing Medicaid statute’s explicit statement that prior

drug lists for prior authorization programs, courts have noted that such lists do not
place any drugs in a non-covered category, the essence of a “formulary,” and that the
Medicaid statute specifically provides that “[a] prior authorization program
established by a State under paragraph (5) is not a formulary.”28
If the non-interference provision and formulary and price setting restrictions are
repealed, the Secretary must still decide whether or not to adopt a formulary and
decide how restrictive it might be. At the national level, these decisions would be
much more difficult and problematic. If the formulary prohibition is not repealed and
other forms of negotiating leverage29 are not provided, then the bargaining power of
the Secretary would reflect the leverage available to the Secretary through authority
granted elsewhere in statute — for instance, his ability to encourage, conduct, and
disseminate research on drug prices and their comparative effectiveness, the ability
to review and approve plan bids, and the strength of the Secretary’s influence through
persuasion, as well as other credible threats.
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. The direct effects on beneficiaries, drug companies, wholesalers,
pharmacy benefit managers are potentially great, but the long-term and secondary
effects on the overall population and the industry may also be significant and are
important to consider.
Ability to Achieve Discounts
The main argument advanced by advocates for granting the federal government
the power to negotiate is that lower prices for prescription drugs might be obtained
from pharmaceutical manufacturers and passed on to Medicare beneficiaries. By
using the market power of roughly 43.7 million Medicare beneficiaries, proponents
argue that the pharmaceutical companies would provide deep discounts to the federal
government in order to prevent the loss of a significant portion of their market.
A Government Accountability Office (GAO) study based on data from the mid-

1990s found that average VA-negotiated prices are less than 50% of the non-federal

27 (...continued)
authorization programs are not formularies).
28 42 U.S.C. 1396r-8(d)(1)(A).
29 For instance, making Medicaid reimbursement of prescription drugs conditional upon the
manufacturers’ including their product in the Federal Supply Schedule is a substantial
incentive for pharmaceutical companies.

average manufacturer’s price.30 In 2000, GAO reported that the prices paid by the
Department of Defense (DOD) and VA for 21 brand-name drugs with no generic
equivalents were 27% and 30% lower on average than those certified to the Health
Care Financing Administration (HCFA, now the Centers for Medicare and Medicaid
Services) as “best price.”31
However, there is uncertainty about the potential effectiveness of the federal
government in obtaining drug price discounts that are greater than those currently
negotiated by private Medicare Part D plans. The first year of experience with the
Medicare prescription drug benefit has produced lower-than-expected program
expenditures, which supporters of the program attribute to the lower drug prices that
drug plans have been able to negotiate in response to strong competition. Critics
counter that the lower expenditures are a result of lower-than-expected enrollment
and a preference among enrolled beneficiaries for plans with lower premiums and
less generous drug coverage.
The argument that the size of the Medicare market would provide federal
negotiators with an advantage over private plans in obtaining discounts from
pharmaceutical manufacturers has been questioned.32 Large PBMs, such as Advance
PCS (75 million covered individuals), Medco Health Solutions (65 million) and
Express Scripts (57 million) have significant market power and an established track
record in negotiating prescription drug discounts for large populations. The size of
the market itself is not as important as the ability to influence and direct the
consumption patterns of that market. Much of the PBMs’ ability to achieve price
concessions from manufacturers reflects their ability to influence drug consumption
behavior and to potentially move market share through financial incentives involving
varying cost-sharing tiers, formularies that offer the possibility that certain products
will be excluded and drug management strategies including step therapy. For these
reasons and others, critics claim that PBMs with large numbers of Medicare Part D
enrollees would be able to negotiate discounts and produce savings at least as great
as anything that the federal government could negotiate.33
The Congressional Budget Office (CBO), at the request of congressional
leaders, examined the effect of striking the “noninterference” provision and estimated

30 GAO, Drug Prices: Effects of Opening Federal Supply Schedule for Pharmaceuticals Are
Uncertain, Washington, June 1997, GAO/HEHS-97-60.
31 Drug Prices Paid by DOD and VA are, on Average, Lower Than Those Certified to HCFA
as Best Price, GAO-01-175R, Oct. 31, 2000.
32 See, for example, Enthoven, A., and Fong, K., “Medicare: Negotiated Drug Prices May
Not Lower Costs,” Brief Analysis No. 575, National Center for Policy Analysis, Dec. 18,


33 One counter argument to this point is that while large PBMs may cover more individuals
than the Medicare program, Medicare beneficiaries consume more prescription drugs per
capita than those under 65, and so the Medicare market represents a greater share, and
therefore more “clout.”

that it would have a negligible effect on federal spending.34 Similarly, the Chief
Actuary at CMS concluded that giving the Secretary the ability to directly negotiate
prescription drug prices might not produce additional savings over what private plans
negotiate. Both CBO and the CMS Chief Actuary determined that the price
concessions extracted by the federal government might not exceed those that private
plans might achieve.
The magnitude of any discounts resulting from federal negotiation on behalf of
Medicare beneficiaries would depend critically on a number of variables and would
likely vary depending on the drug. As the VA’s experience illustrates, larger
discounts are more likely to be achieved for drugs in classes in which there are many
alternatives. This is where the VA’s greatest discounts are achieved. For single-
source drugs, the government may still be able to obtain substantial discounts, but it
may depend on what specific bargaining power is available to the Secretary. As
noted above, all pharmaceutical companies have an incentive to have their products
listed on the FSS because participation is tied to eligibility for Medicaid
Drug Availability for Beneficiaries
Proponents of a market-based, decentralized approach believe that by having a
variety of organizations negotiating different prices, more choices will be available
to Medicare beneficiaries and, therefore, better patient outcomes. Instead of being
limited to the discounted drugs Medicare negotiates, they say, discounts for the
plentitude of organizations offering prescription drug plans will result in a broader
range of drugs being discounted. In this view, beneficiaries will then be able to
choose the plan that best meets their individual prescription drug needs and acquire
them at competitive market prices.
One study claims that the number of drugs available under the VA formulary is
more restrictive than those available from private Medicare Part D plans.35 The
report also claims that the drugs on the VA formulary are older than drugs on
formularies used by private plans. However, these assertions and their underlying
logic have been challenged by the VA and others. The VA’s formulary is not
necessarily more restrictive than those of private insurers and the claim that VA
formulary drugs may be older is not necessarily an indication that VA beneficiaries
are receiving lower-quality health care.

34 Letter from CBO to the Honorable William H. Frist, M.D., Estimate of the Effect of
Striking the “Noninterference” Provision as Added by P.L. 108-173, the Medicare
Prescription Drug, Improvement, and Modernization Act of 2003, Jan. 23, 2004
[ h t t p : / / www.cbo.gov/ s howdoc.cf m?i ndex=4986&sequence=0] .
35 Lichtenberg, F., Older Drugs, Shorter Lives? An Examination of the Health Effects of the
Veterans Health Administration Formulary, Medical Progress Report No. 2, Manhattan
Institute, October 2005. Although this is not a peer-reviewed study and the methodology and
findings have been criticized, the assertion that VA has a more restrictive formulary has
been picked up and voiced by others.

The data also show that there is a sizeable discrepancy in the number of drugs
on the formularies of private plans and that the VA offerings are in line with those
of many private Part D plans. For FY2006, the VA reports that 1,294 drug entries
are listed on the VA national formulary (VANF), encompassing different dosage
strengths.36 In contrast, a survey of national PDPs in 2006 showed that the number
of drugs offered ranged from 626 (WellCare) to 2,773 (Aetna MedicareRx
Premier). 37
Similarly, older drugs are not necessarily inferior drugs. A recent study based
on a randomized controlled trial showed that older, less expensive anti-psychotic
drugs were just as effective and safe in treating schizophrenia as newer drugs that
were much more expensive.38 The VA claims that the decisions that go into
managing the formulary are based on a careful review of the scientific evidence, and
that the choice of drugs is not solely determined by the lowest price.39 The VA cites
its comparative experience with Vioxx as an example of the effectiveness of its
process; the VA never included the drug on its national formulary because of
concerns about the scientific evidence regarding the drug’s safety.40
Innovation and New Drug Development
The effect of decreased revenues on the short- and long-term development of
new drugs is an issue of ongoing debate. Pharmaceutical manufacturers have stated
that research and development will suffer if retail prices are diminished and returns
from investment are squeezed. While this is undoubtedly true in the extreme, the

36 Other studies reporting a discrepancy may reflect a difference in how the drugs are
counted: when different drugs and dosage strengths are considered separately, there are
4,778 drug entries on the VANF. Including products that are dispensed but not on the
VANF brings the total number of drugs to 6,194. Data provided at briefing for CRS staff
by the Pharmacy Benefits Management Strategic Healthcare Group, Department of Veterans
Affairs, Dec. 12, 2006.
37 Avalere Health, LLC. DataFrame News, Figure 1, “National PDP Offerings Overview,”
January 2006.
38 Jones, P. et al., “Randomized Controlled Trial of the Effect on Quality of Life of Second-
vs. First-Generation Antipsychotic Drugs in Schizophrenia,” Archives of General
Psychiatry. Vol. 63, No. 10, October 2006, pp. 1079-87.
39 Briefing by the Pharmacy Benefits Management Strategic Healthcare Group of the
Department of Veterans Affairs, Dec. 12, 2006.
40 Vioxx is a prescription COX-2 selective, non-steroidal anti-inflammatory drug (NSAID)
that was approved by FDA in May 1999 for the relief of the signs and symptoms of
osteoarthritis, for the management of acute pain in adults, and for the treatment of menstrual
symptoms. Merck & Co., Inc. announced a voluntary withdrawal of Vioxx (rofecoxib) from
the U.S. and worldwide market on September 30, 2004, due to safety concerns of an
increased risk of cardiovascular events (including heart attack and stroke) in patients on
Vioxx. On November 5, 2004, the medical journal The Lancet published a meta-analysis of
the available studies on the safety of rofecoxib (Jüni et al., 2004) in which the authors
concluded that rofecoxib should have been withdrawn several years earlier. For additional
information, see the FDA Web page on COX-2 selective NSAIDs at [http://www.fda.gov/
cder/drug/infopage/COX 2/default.htm] .

evidence that quantifies the degree to which reductions in retail prices would lead to
fewer new products being introduced is controversial and reflects a wide range of
potential responses.
Some research claims that the consequence of decreased revenue and profits
resulting from low negotiated prices will be reduced investment in research and
development, declining innovation, and fewer new drugs brought to market. Other
studies indicate that there has not been a strong relationship between the amount of
research and development funds expended by the pharmaceutical industry and the
introduction of new drug applications to the FDA.
One report claims that government-mandated negotiations would reduce the
development of new, life-saving drugs by about a dozen annually, and estimates that
“federal price negotiations would yield a loss of 5 million life-years annually, an
adverse effect that can be valued conservatively at about $500 billion per year.”41
Other research suggests that the relationship between pharmaceutical research
and development costs and new drugs is not so sensitive. GAO found that over the
last decade, the increase in research and development expenditures as reported by the
pharmaceutical industry has not been matched by the growth in the number of new
drug applications (NDAs). GAO examined all NDAs submitted to the FDA between
1993 and 2004 and found that “despite increasing expenditures on research and
development, new drug development, and in particular, development of new
molecular entities (NMEs) — potentially innovative drugs containing ingredients that
have never been marketed in the United States — has become stagnant.”42
Consistency and Manageable Choice
Another potential consequence of the federal government negotiating drug
prices is that prices might become more consistent and less variable across
beneficiaries. Medicare Part D beneficiaries who belong to different PDP/MA-PD
plans face different prices, depending on what the individual organizations negotiate
and pass on to beneficiaries in savings. In response to the panoply of Medicare drug
plans available, some observers, including patient advocacy groups, have suggested
that that the plethora of choices is not universally viewed by beneficiaries as a
positive outcome.
A growing body of research suggests that individuals faced with many choices
may find that having more alternatives can be counterproductive. One study found
that plans that offered more 401(k) options had lower participation rates compared
to plans that offered only a handful of choices; “every ten funds added, other things

41 Zycher, B., The Human Cost of Federal Price Negotiations: The Medicare Prescription
Drug Benefit and Pharmaceutical Innovation. Center for Medical Progress, Manhattan
42 New Drug Development: Science, Business, Regulatory, and Intellectual Property Issues
Cited as Hampering Drug Development Efforts, GAO-07-49, November 2006.

equal, is associated with a 1.5% to 2% drop in [the] participation rate.” 43 Another
study found that while grocery store consumers were initially more attracted to a
booth displaying 24 jam choices, a higher percentage of consumers who saw only six
choices subsequently purchased the jam by a factor of 10. Related work also showed
that ex post satisfaction was higher among those who had fewer than those who had
more choices.44 As a consequence, some legislators have suggested placing limits on
the number of Medicare Part D plans to alleviate the difficulties some beneficiaries
have had in choosing from among such a broad set of plans.45
Effect on Overall Costs and Population Health
The effect of lower drug prices on overall health care costs and population
health is varied. If lower prices lead to a higher rate of filled prescriptions among
beneficiaries who previously under-used needed medications, then the increase in
prescription drug use may lead to improved outcomes. There is also the potential
savings if the increased drug treatments are substitutes for more expensive and less
effective care — for instance, if hypertension can be managed with medicines that
obviate the need for surgical interventions.
Alternatively, higher out-of-pocket prices for prescription drugs have been
found to reduce the use of drugs by patients consistently.46 Recent research suggests
that this effect may also persist over time, with implications for higher overall health
care costs. One study found that beneficiaries facing higher out-of-pocket costs for
prescription drugs not only use fewer drugs contemporaneously, but the reduction
persists and is stronger in the second year. Overall, the expenditure savings on
prescription drugs are largely offset by increases in spending for outpatient services,
which tend to increase in response.47

43 G. Huberman and W. Jiang. “Offerings vs. Choice by 401(k) Plan Participants: Equity
Exposure and Number of Funds,” Journal of Finance, to appear. See [http://papers.ssrn.
com/ sol3/papers.cfm?abstract_id=646601].
44 S.S. Iyengar and M.R. Lepper, “When Choice Is Demotivating: Can One Desire Too
Much of a Good Thing?” Journal of Personality and Social Psychology, vol. 79, pp.

995-1006, 2000.

45 For more information, see CRS Report RL33300, Standardized Choices: Medigap
Lessons for Medicare Part D, by Jim Hahn.
46 See, for example, Goldman, D. et al., “Pharmacy Benefits and the Use of Drugs by the
Chronically Ill,” JAMA: The Journal of the American Medical Association, May 2004, Vol.
291, No. 19, 2344-2350, and Huskamp, H. et al., “The Effect of Incentive-based Formularies
on Prescription Drug Use and Spending,” New England Journal of Medicine, December

2003, Vol. 349, No. 23, 2224-2232.

47 Gaynor, M., Li, J., and Vogt, W., “Is Drug Coverage A Free Lunch? Cross-Price
Elasticities and the Design of Prescription Drug Benefits,” National Bureau of Economic
Research Working Paper 12758, December 2006.

Impact on Other Sectors of the Pharmaceutical Industry
Federal negotiations on drug prices through the VA and the Medicaid programs
have had noticeable effects on the industry. The Medicare program, with a similarly
large number of beneficiaries who consume more drugs per capita, might have even
more dramatic effects.
The function of wholesalers is often overlooked in discussions about the
pharmaceutical industry, but they play an important role in the experience of the VA.
Although the VA solicits bids that have allowed for multiple wholesalers, in recent
years the VA has awarded the contract to a single company. Recent estimates place
the value of the contract at $3 billion a year for the selected contractor. To illustrate
the importance of the VA contract and how significant industry observers consider
it to be, the share values of the drug distributor AmerisourceBergen Corporation fell
11.6% and the company lowered its 2004 earnings estimate by almost 10% after
losing the contract to the McKesson Corporation.48 The Medicare market for
prescription drugs is significantly larger than the VA market, and if structured
similarly, the federal contracts with the Medicare program stand to carry similar or
greater impacts for the industry.
Effect on Drug Prices in Other Markets
Because of the complex relationships in drug prices across different types of
buyers, the effect of changing one price, such as negotiating a discount for Medicare
beneficiaries, may have indirect consequences on other prices. While drug prices
paid by Medicare beneficiaries may fall in the short run, overall drug prices may
increase in the long run for other consumers, specifically for the under-65 population.
Under this argument, pharmaceutical companies might increase the prices they
charge to other buyers in response to the lower prices negotiated by the federal
government for Medicare beneficiaries. Similarly, as the “best price” increases, the
prices for other buyers who calculate reimbursements that are referenced to the “best
prices” would also rise, potentially affecting both VA prices and Medicaid prices.
Finally, those who oppose government involvement in prescription drug price
negotiations claim that the government would be setting prices, not negotiating.
They cite the experience in other parts of the Medicare program, where provider
reimbursement under Parts A and B are set by the Medicare program, and claim that
the federal government would impose a similarly rigid pricing schedule on the
prescription drug market. Whether this comes to pass depends on the specifics of
how the legislation and subsequent regulations are written, and which approach is
chosen to implement any given authority to affect drug prices on behalf or Medicare

48 “McKesson Wins Government Drug Contract,” New York Times, January 1, 2004.

Recent Legislative Activity
H.R. 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,49 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. The bill would also require the Secretary
to submit a report “on negotiations conducted by the Secretary to achieve lower
prices for Medicare beneficiaries, and the prices and price discounts achieved by the
Secretary as a result of such negotiations” to the committees on Ways and Means,
Energy and Commerce, and Oversight and Government Reform of the House of
Representatives and the Committee on Finance of the Senate beginning no later than
June 1, 2007, and every six months thereafter. The bill would take effect on the date
of enactment and would first apply to negotiations and prices for plan years
beginning on January 1, 2008.
CBO has scored the bill as having “a negligible effect on federal spending.”
CBO anticipates that “the Secretary would be unable to negotiate prices across the
broad range of covered Part D drugs that are more favorable than those obtained by
PDPs under current law.” 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.50 CMS actuaries have also
concluded that H.R. 4 would not produce lower drug prices or any additional

49 H.R. 4, Section 2(a)(i)(1) reads, “IN GENERAL. — Notwithstanding any other provision of
law, the Secretary shall negotiate with pharmaceutical manufacturers the prices (including
discounts, rebates, and other price concessions) that may be charged to PDP sponsors and
MA organizations for covered part D drugs for part D eligible individuals who are enrolled
under a prescription drug plan or under an MA — PD plan.”
50 In its January 10, 2007 letter to Congress, CBO asserts that, “without the authority to
establish a formulary, we believe that the Secretary would not be able to encourage the use
of particular drugs by Part D beneficiaries, and as a result would lack the leverage to obtain
significant discounts in his negotiations with drug manufacturers. ... Under current law,
PDPs are allowed to establish formularies — subject to certain limits — and thus have some
ability to direct demand to drugs produced by one manufacturer rather than another. The
PDPs also bear substantial financial risk and therefore have strong incentives to negotiate
price discounts in order to control their costs and offer coverage that attracts enrollees
through features such as low premiums and cost-sharing requirements. Therefore, the PDPs
have both the incentives and the tools to negotiate drug prices that the government, under
the legislation, would not have. H.R. 4 would not alter that essential dynamic.”
51 CMS press release, “CMS Actuaries Conclude That H.R. 4 Would Have No Effect on
Lowering Drug Prices,” Jan. 11, 2007.

S. 3
On April 11, 2007, the Senate Finance Committee passed an amended version
of S. 3 that repeals the noninterference provision but does not mandate that the
Secretary negotiate for lower prescription drug prices. The bill also includes
additional provisions to increase transparency in the Part D program by making some
data available to congressional support agencies and to prioritize comparative
effectiveness research on drugs.
The bill as passed by the Finance Committee would allow data collected by the
Secretary on PDPs and MA-PDs to be used by congressional support agencies (the
Congressional Budget Office, or CBO; the Congressional Research Service, or CRS;
the Government Accountability Office, or GAO; and the Medicare Payment Advisory
Commission, or MedPAC) to fulfill their duties.
Upon request, the Secretary would make available to any of the congressional
support agencies aggregate data on negotiated prices including discounts, subsidies,
and rebates; drug claims data; reinsurance payments paid to plans; and the
adjustments of payments to plans as a result of the risk corridors established under
MMA. In addition, CBO would be able to obtain non-aggregated information about
negotiated rebates, discounts, and other price concessions by drug and by contract or
plan. The congressional support agencies would be prohibited from disclosing the
information in any manner that would result in the disclosure of trade secrets, and
where the disclosure, report, or release of the information would permit the
identification of a specific prescription drug plan, MA-PD plan, pharmacy benefit
manager, drug manufacturer, drug wholesaler, drug, or individual enrolled in a
prescription drug plan or an MA-PD plan.
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. A report on this
study would be due a year after enactment.
The bill would also require the Secretary to make public the data on the prices
charged for each covered part D drug under each prescription drug plan and MA-PD
plan to individuals enrolled in the plan. The data would reflect actual prices posted
on the website of the Centers for Medicare and Medicaid Services, and would be
made available in a manner that permits linkage of the data to data contained in other
public prescription drug plan and MA-PD plan data files.
S. 3 would also instruct the Secretary of HHS to develop a new prioritized list
of comparative clinical effectiveness studies on prescription drugs covered under Part
D. The list is to reflect studies most critical to advancing value-based purchasing of
covered Part D drugs. The bill would also establish an advisory committee to
provide advice on setting priorities for comparative clinical effectiveness studies.

The committee would include a diverse range of public and private experts,
stakeholders, and interests from industry, patients and representatives of patients,
researchers, and government with no group having a majority of members.
Within one year of the enactment of the act, the Secretary would be required to
submit a report to Congress that would include (1) the prioritized list of comparative
clinical effectiveness studies and plans for the conduct of the studies; (2) a summary
of the four factors the Secretary would be required to take into account in
constructing the list; and (3) an explanation of how the Secretary took into account
each of the four factors in developing the list and preparing the report. The Secretary
would be required to make the report publicly available.
Finally, S. 3 would also instruct pharmacy and therapeutic (P&T) committees
to consider comparative clinical effectiveness studies in developing and reviewing
formularies for Medicare prescription drug plans, if relevant. Currently, guidelines
for Medicare Part D formularies require the inclusion of two drugs in each
therapeutic class, except if only one drug is available, coverage of “all or
substantially all” drugs in six protected classes.52 Plans can neither change their
formularies without CMS approval nor drop coverage for persons currently using the
drug, except at the beginning of the calendar year.
CBO’s evaluation of S. 3 is very similar to its assessment of H.R. 4. In a letter
dated April 10, 2007, CBO wrote that
modifying the noninterference provision would have a negligible effect on
federal spending because we anticipate that under the bill the Secretary would
lack the leverage to negotiate prices across the broad range of covered Part D
drugs that are more favorable than those obtained by PDPs under current law.
Without the authority to establish a formulary or other tools to reduce drug
prices, we believe that the Secretary would not obtain significant discounts from53
drug manufacturers across a broad range of drugs.
CBO’s letter also noted that the provisions of the bill that would permit
Congressional support agencies access to Part D data and establish a prioritized list
of potential studies of the comparative clinical effectiveness of drugs covered under
Part D “would have no effect on direct spending.”
On April 18, 2007, the Senate did not invoke cloture on S. 3.
This report will be updated.

52 These classes cover drugs for some mental illnesses — including antidepressants,
antipsychotics, and anticonvulsants — as well as anticancer drugs, immunosuppressants, and
HIV/AIDS drugs.
53 CBO letter to Congress, “Cost Estimate of Draft Legislation that Would Change
Medicare’s Prescription Drug Program,” April 10, 2007.