The Big Four price is the maximum price a drug manufacturer is allowed to charge the Big Four federal agencies, which are the Department of Veterans Affairs (VA), the Department of Defense (DoD), the Public Health Service (including the Indian Health Service), and the Coast Guard.
Those comparisons of average drug prices among federal programs do not indicate how prices would change if the method of determining prices in one program was extended to other programs. In such a scenario, drug manufacturers would very likely alter their price negotiations with purchasers in ways that could affect the prices in all federal programs and in the private sector.
CBO also compared the prices of specialty drugs (from the sample of top-selling drugs), which treat chronic, complex, or rare conditions, frequently have high prices, and may require special handling or patient monitoring. The average price of specialty drugs ranged from $1,889 in Medicaid to $4,293 in Medicare Part D.
The main analysis focuses on the prices (net of applicable rebates and discounts) of 176 top-selling brand-name drugs in Medicare Part D. CBO computed the average price of those drugs per standardized prescription—a measure that roughly corresponds to a 30-day supply of medication.
The federal government is a major purchaser of prescription drugs, both directly through federal agencies, such as the Department of Defense (DoD), and indirectly through federal health insurance programs, such as Medicare Part D. In this report, the Congressional Budget Office describes how the prices of brand-name prescription drugs are determined in different federal programs and compares drug prices among those programs in 2017.
As referred to in this report, the Affordable Care Act comprises the Patient Protection and Affordable Care Act (Public Law 111-148), the health care provisions of the Health Care and Education Reconciliation Act of 2010 (P.L. 111-152), and the effects of subsequent judicial decisions, statutory changes, and administrative actions.
Summary
The federal government is a large purchaser of pharmaceuticals. In 2018, federal spending on outpatient prescription drugs accounted for more than 40 percent of total U.S. expenditures on such drugs that year. Federal spending on prescription drugs consists of direct purchases by federal agencies, such as the Department of Defense (DoD), and indirect purchases through federal health insurance programs, such as Medicare Part D. The prices of prescription drugs in federal programs have important implications for the federal budget, patients, drug manufacturers and distributors, and pharmacies. Federal programs vary greatly in how the prices for prescription drugs are determined, resulting in substantial variation in those prices.
What Programs Did CBO Examine?
In this report, the Congressional Budget Office describes how the prices of brand-name prescription drugs are determined in the following federal programs and compares drug prices among those programs:
Medicare Part D (the prescription drug program for Medicare beneficiaries);
Medicaid;
The Federal Supply Schedule (FSS) for pharmaceuticals program, which establishes prices available to all direct federal purchasers (federal agencies that buy drugs directly from wholesalers or manufacturers and provide their own dispensing services);
The federal ceiling price (FCP) program, which establishes prices available to the Big Four agencies (the four largest direct federal purchasers)—the Department of Veterans Affairs (VA), DoD, the Public Health Service, and the Coast Guard;
VA’s prime vendor program; and
DoD’s TRICARE program, which consists of both the agency’s prime vendor program, in which drugs are dispensed at military treatment facilities (MTFs) or by mail, and the TRICARE retail pharmacy network.
How Are Prices Determined in Those Programs?
The approaches used to determine the prices of brand-name prescription drugs vary greatly among programs.
In Medicare Part D, private insurers (or pharmacy benefit managers operating on their behalf) and manufacturers negotiate to determine drug prices under market conditions similar to those facing commercial insurers.
In Medicaid, manufacturer rebates that are specified by federal statute reduce drug prices.
Prices listed on the FSS, to which direct federal purchasers have access, are determined through a combination of statutory rules and negotiation.
The Big Four agencies generally pay lower prices than other direct federal purchasers because of a statutory cap on the prices they pay.
VA and DoD often pay lower prices than the other Big Four agencies for drugs dispensed through their medical facilities or by mail. They obtain those lower prices primarily because they use national formularies (preapproved lists) of preferred drugs, steer patients to lower-cost drugs, and buy drugs in large volumes—all of which increase their leverage with drug manufacturers.
DoD reimburses a network of retail pharmacies for drugs dispensed to TRICARE enrollees. Drugs sold through the TRICARE retail pharmacy network are subject to mandated refunds from manufacturers that are akin to rebates in other programs. However, the prices of drugs dispensed through that network are higher than the prices of drugs dispensed through MTFs or by mail. VA also allows veterans to obtain prescription drugs at retail pharmacies through its community care program, but relatively few drugs are dispensed through that program, which is not examined in this report.
Drug manufacturers routinely offer temporary price reductions to direct federal purchasers, which can enable Big Four agencies to purchase drugs at prices below the Big Four prices (the maximum prices those agencies are required to pay) and other agencies to purchase drugs at prices below the FSS prices.
What Data and Measures of Prices Did CBO Use?
CBO compared drug prices (net of applicable rebates and discounts) among programs by computing the weighted-average price for two different samples of brand-name drugs in Medicare Part D: a sample of 176 top-selling drugs and a sample of 64 high-priced drugs. Those two samples accounted for 85 percent and 16 percent, respectively, of total spending on brand-name prescription drugs in Medicare Part D in 2017.
The net prices reflect the amounts paid by federal agencies or insurance programs plus the amounts, if any, paid out of pocket by beneficiaries. CBO also compared prices for the subset of top-selling drugs that are specialty drugs. Such drugs typically treat chronic, complex, or rare conditions, frequently have high prices, and may require special handling or patient monitoring. Because CBO used the retail price (the price before accounting for rebates and discounts) to identify the samples of top-selling and high-priced drugs, those samples were not skewed toward drugs with high net prices in Medicare Part D.
In each case, CBO computed the average price per standardized prescription—a measure that roughly corresponds to a 30-day supply of medication. The analysis compared prices from 2017, the most recent year for which data were available when the work began.
How Do Prices Compare Among Programs?
Key findings from CBO’s analysis of 176 top-selling brand-name drugs include the following:
The average net price per standardized prescription ranged from $118 in Medicaid to $343 in Medicare Part D. The much lower net prices in Medicaid are the result of larger manufacturer rebates in that program than in Medicare Part D.
The average FSS price was $317, and the average Big Four price was $273.
The average prices for VA and DoD were $190 and $184, respectively, for drugs dispensed at the agencies’ medical facilities or by mail.
The average net price in the DoD TRICARE retail pharmacy network was $272.
Pharmacy dispensing fees are incorporated into the prices in Medicare Part D, Medicaid, and the TRICARE retail pharmacy network. However, the prices for VA and DoD (for drugs dispensed through their medical facilities or by mail) do not include the agencies’ costs of dispensing drugs. Adjusting for that difference would not change the finding that the prices of brand-name drugs purchased by VA and DoD are higher than those in Medicaid and lower than those in Medicare Part D, because the best evidence is that pharmacy dispensing fees account for between 3 percent and 6 percent of the price of brand-name drugs. The estimated prices for Medicare Part D and Medicaid also include an amount retained by wholesalers, which averages about 1 percent of the price of brand-name drugs. Both VA and DoD receive discounts from their wholesalers, which are reflected in the prices estimated for this report.
Among the sample of 176 top-selling drugs, the average net price of specialty drugs was much higher than that of other drugs, ranging from $1,889 in Medicaid to $4,293 in Medicare Part D. The average net price of the sample of 64 high-priced drugs (most of which were specialty drugs) ranged from $5,841 in Medicaid to $11,484 in Medicare Part D.
The comparisons of average drug prices among federal programs in this report do not indicate how prices would change if one program’s method of determining prices was extended to other programs. In such a scenario, drug manufacturers would very likely alter their price negotiations in ways that could affect prices in all federal programs and in the private sector.
How Have Price Differences Among Programs Changed Since 2003?
In an earlier report, CBO compared the prices of brand-name drugs among federal programs in 2003, which was before Medicare Part D was implemented. In that analysis, the average net price in Medicaid for a sample of top-selling drugs was higher than the average prices paid by VA and DoD. CBO used different methods in the previous report, and the agency has not fully analyzed the reasons for the differences in its findings. The increase in Medicaid rebates paid by drug manufacturers is most likely a key reason that net prices in Medicaid are now lower than those paid by VA and DoD.
How Brand-Name Drug Prices Are Determined in Different Federal Programs
There are many different purchasers of prescription drugs within the federal government, and they pay a variety of prices. Those prices reflect several factors, including statutory regulations, whether and how preferred drug formularies are used, and overall conditions in the prescription drug market that affect all purchasers, public or private. The prices of brand-name drugs in Medicare Part D are determined through negotiations between private plans and manufacturers under market conditions similar to those facing commercial insurers. Drug prices in Medicaid are heavily influenced by manufacturer rebates specified by federal statute. Drug prices in other federal programs are determined through a set of statutory rules and negotiations (see Table 1). Medicare Part D is the largest federal prescription drug program ($88.3 billion in federal expenditures on outpatient prescription drugs in 2018), followed by Medicaid ($21.8 billion), DoD ($7.7 billion), and VA ($7.2 billion).
Table 1. Comparison of Selected Federal Programs Providing Outpatient Prescription Drug Coverage Data source: Congressional Budget Office. See www.cbo.gov/publication/56978#data. CMS = Centers for Medicare & Medicaid Services; DoD = Department of Defense; PBM = pharmacy benefit manager; VA = Department of Veterans Affairs. a. In certain limited cases, veterans can obtain prescription drugs at retail pharmacies through VA’s community care program. b. The Big Four are the four largest direct federal purchasers of prescription drugs (VA, DoD, the Public Health Service, and the Coast Guard). c. The amount shown for each program represents total federal expenditures on all outpatient prescription drugs, not just expenditures on brand-name drugs. Out-of-pocket expenditures, such as copayments or deductibles, are excluded. d. The amount for Medicare Part D is for calendar year 2018 and represents the federal government’s gross spending on benefits, including enrollees’ premiums. The figure for total prescription drug expenditures by Medicare reported in the National Health Expenditure Accounts includes spending on outpatient drugs covered under Part B as well as Part D. In a personal communication, CMS staff apprised CBO of the amount of spending attributed solely to Part D. e. The amount for Medicaid is for calendar year 2018 and includes federal expenditures for the Children’s Health Insurance Program. State expenditures on those programs are not included. The amount is based on data from the National Health Expenditure Accounts maintained by CMS. f. The amount for VA is for fiscal year 2018. Because data on drug spending in the National Health Expenditure Accounts excluded certain expenditures by VA, those data were not used to estimate the amount the agency spent on drugs. Instead, CBO used amounts reported by VA. See Department of Veterans Affairs, “FY 2020 Budget Subnmission” (Zip file), Volume II: Medical Programs and Information Technology Programs (February 10, 2020), p. VHA-167, https://go.usa.gov/xAa6E (PDF, 5.2 MB). g. The amount for DoD’s TRICARE program is for fiscal year 2018. Because data on drug spending in the National Health Expenditure Accounts excluded certain expenditures by DoD, those data were not used to estimate the amount the agency spent on drugs. Instead, CBO used amounts reported by DoD: See Department of Defense, Evaluation of the TRICARE Program: Fiscal Year 2020 Report to Congress (February 2020), p. 43, https://go.usa.gov/x7pFU.
This report estimates the prices of outpatient brand-name prescription drugs that are self-administered and typically obtained at pharmacies, including mail-order pharmacies. The report focuses on brand-name drugs because they generally have much higher prices than generics and have been the main focus of policymakers’ concerns about drug prices. In 2017, about three-quarters of total spending on drugs in Medicare Part D (calculated using retail prices) was on brand-name drugs. The prices of physician-administered drugs and drugs purchased and administered in hospitals or other facilities are not included in the analysis.
Medicare Part D
The drug benefit in Medicare Part D is delivered through private insurance plans that compete on the basis of their premiums and benefit design. Two types of Part D plans are available: stand-alone plans, which only cover prescription drugs, and Medicare Advantage prescription drug plans, which cover prescription drugs and provide other Medicare benefits. For each type of plan, drug prices are determined by negotiations between plans (or their pharmacy benefit managers—PBMs) and manufacturers under market conditions similar to those affecting commercial insurers.
Part D beneficiaries obtain prescription drugs from pharmacies, which generally purchase the drugs from wholesalers (see Figure 1). Beneficiaries typically pay a portion of the price for a prescription at the point of sale in the form of cost sharing (the amount of which depends on the plan’s benefit structure and the phase of coverage the beneficiary is in). Pharmacies receive the rest of the price of a prescription from PBMs, which are private companies that manage prescription drug benefits on behalf of insurance plans (including Part D plans and commercial insurers). The amount of the payments from PBMs to pharmacies reflects the terms of service agreements that Part D plans negotiate with PBMs.
Figure 1. Medicare Part D’s System for Purchasing Brand-Name Outpatient Prescription Drugs Data source: Congressional Budget Office, adapted from Kaiser Family Foundation, Follow the Pill: Understanding the U.S. Commercial Pharmaceutical Supply Chain (prepared by Health Strategies Consultancy, March 2005), https://tinyurl.com/y63m7ck2. CMS = Centers for Medicare & Medicaid Services. a. Many Part D plans own their pharmacy benefit managers. b. A recent analysis found that in 2016, pharmacy benefit managers passed nearly all the rebates they received from manufacturers on to the Part D plans. See Government Accountability Office, Medicare Part D: Use of Pharmacy Benefit Managers and Efforts to Manage Drug Expenditures and Utilization, GAO-19-498 (July 2019), www.gao.gov/products/gao-19-498. c. Price concessions from pharmacies after the point of sale take the form of periodic payments from pharmacies to the plans or to pharmacy benefit managers.
The net prices ultimately paid by Part D plans for prescription drugs dispensed to beneficiaries are greatly affected by rebates that the PBMs and Part D plans receive from drug manufacturers. Those rebates are generally known only to the negotiating parties, though Part D plans must report any rebates and discounts they receive to the Centers for Medicare & Medicaid Services (CMS), the federal agency that administers the Medicare and Medicaid programs. In 2016, manufacturers paid an estimated $27 billion in rebates to PBMs and Part D plans. PBMs can secure rebates by including a manufacturer’s drug on a plan’s formulary—that is, the list of drugs covered by the plan—or by placing the drug on a tier within a plan’s formulary that requires lower cost sharing, making it more attractive to beneficiaries than competing drugs. Different tiers usually have varying cost-sharing requirements: Generic drugs typically have the lowest cost-sharing requirements, followed by preferred brand-name drugs (drugs for which the plan has negotiated a rebate in exchange for preferred status), followed by nonpreferred brand-name drugs. When several competing drugs with comparable clinical benefits are available, plans and PBMs have greater leverage to negotiate larger rebates; when a brand-name drug offers unique and substantial clinical benefits, plans and PBMs have less leverage in negotiations, and rebates tend to be smaller.
Net prices in Part D can also be reduced by discounts that manufacturers are required to provide to beneficiaries on brand-name drug costs incurred in the “coverage gap” of the Part D benefit. Before 2011, the standard Part D benefit did not cover the costs for any drugs purchased in that phase of the benefit, but the Affordable Care Act (ACA) gradually eliminated the gap in coverage, beginning in 2011. To help finance the phasing out of the coverage gap, the law required drug manufacturers to provide a 50 percent discount on brand-name drugs purchased by enrollees when their spending on covered drugs placed them in that phase of the Part D benefit. Legislation enacted in 2018 increased the required manufacturer discount from 50 percent to 70 percent.
Furthermore, net prices in Part D are often reduced by price concessions from pharmacies after the point of sale, which take the form of periodic payments from pharmacies to the plans or to PBMs. Pharmacies are frequently willing to make those price concessions in exchange for being included in a plan’s preferred pharmacy network. Price concessions from pharmacies are generally much smaller than manufacturer rebates. In 2016, total pharmacy price concessions after the point of sale amounted to an estimated $2.1 billion.
The market conditions facing Part D plans differ from those facing commercial insurers in two important ways that have offsetting effects on the net prices that both groups pay. First, Part D plans are subject to more stringent regulations than commercial insurers with respect to the coverage of certain drugs. Specifically, Part D plans are required to cover all drugs in six “protected” therapeutic classes. (A therapeutic class is a group of drugs that treats a common condition.) That requirement increases beneficiaries’ access to those drugs, but it also reduces the ability of plans to obtain rebates for them. Plans have the greatest leverage to obtain sizeable rebates from drug manufacturers when they can credibly threaten to exclude a drug from their formulary, but that threat is eliminated for the drugs in the protected classes, which the plans must cover. If Part D plans could exclude more drugs from their formularies, the resulting savings might be passed on to beneficiaries in the form of lower plan premiums as plans competed for enrollees.
The second way in which the market conditions facing Part D plans differ from those facing commercial insurers concerns the rebates required by law under the Medicaid program (discussed below). The Medicaid rebate for a particular drug depends partly on the lowest net price offered to a commercial buyer. That makes it costly for drug manufacturers to extend large rebates to commercial insurers because the same rebate would be applied to purchases in Medicaid. Prices in Part D are not included in the calculation of Medicaid rebates, so it is less costly for a manufacturer to offer a large rebate to a Part D plan than to a commercial insurer. Because of that difference, CBO expects that, on balance, net prices for Part D plans are lower on average than those for commercial insurers for the same set of drugs.
Manufacturers typically sell drugs to wholesalers at a negotiated discount from a list price, known as the wholesale acquisition cost (WAC), that the manufacturers establish. Either the WAC or another list price, the average wholesale price (AWP), serves as the basis for negotiations between wholesalers and pharmacies. The WAC and the AWP are both publicly available, but the prices that wholesalers pay manufacturers and the prices that pharmacies pay wholesalers are known only to the negotiating parties.
The original design of the Part D program gave plans incentives to limit drug utilization and to negotiate low prices for drugs because that enabled them to charge lower premiums and attract more enrollees. Plans are at financial risk for a portion of the drug costs incurred by their enrollees—that is, the plans lose money if the costs they incur are greater than they projected. However, the share of drug costs for which plans are at financial risk has declined over the years, which has reduced the plans’ incentives to limit total expenditures, because a greater share of risk is borne by the Medicare program than by the plans. From 2007 to 2017, the share of basic benefit costs for which plans were responsible fell from 53 percent to 29 percent among enrollees without Part D’s low-income subsidy and from 30 percent to 19 percent for enrollees receiving that subsidy. The reinsurance provision of the Part D program has contributed to those changes. (Under the reinsurance provision, the Medicare program pays nearly all of the drug costs for a beneficiary after the total drug spending for that person exceeds a specified threshold.)
Medicaid
Medicaid is an entitlement program, jointly funded by the states and the federal government, that pays for health care services on behalf of certain low-income individuals. The states administer the program under broad federal guidelines. Some Medicaid beneficiaries receive drug benefits through fee-for-service systems, and others receive them through private managed care plans, depending on state policy (and in some cases, depending on beneficiaries’ choices of whether to enroll in a managed care plan). In both cases, net prices in Medicaid are heavily influenced by the Medicaid drug rebate program, which specifies the rebates that drug manufacturers must pay to state Medicaid agencies.
In Medicaid fee-for-service systems, the flow of drugs is similar to that in Medicare Part D, but some of the financial transactions are much different. Beneficiaries, who pay a modest copayment or none at all, obtain drugs from participating pharmacies, which typically purchase them from wholesalers (see Figure 2). The pharmacies receive payment from a state Medicaid agency based on each state’s formula for the cost of acquiring and dispensing the drug.
Figure 2. Medicaid’s Fee-for-Service System for Purchasing Brand-Name Outpatient Prescription Drugs Data source: Congressional Budget Office. This figure depicts the main features of the flow of drug products and payments in a fee-for-service Medicaid system. Many states use pharmacy benefit managers (PBMs) to help administer drug benefits, develop preferred drug lists, and negotiate supplemental rebates with drug manufacturers, though PBMs are not depicted here. In states where Medicaid beneficiaries receive drug benefits through a managed care plan, the purchasing arrangements are different. Many such plans contract with a PBM to negotiate payment rates with pharmacies, negotiate additional rebates with manufacturers (beyond those required by federal statute), develop preferred drug lists, and pay pharmacies for the drugs they dispense. AMP = average manufacturer price; CMS = Centers for Medicare & Medicaid Services. a. The best price is the lowest net price at which a drug is offered to any private buyer. It is used to compute rebates in the Medicaid program.
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For Medicaid beneficiaries who receive their drug benefits through a managed care plan, the state Medicaid agency pays a predetermined payment per enrollee to the plan to cover the expected cost of drugs and other benefits. Medicaid managed care plans often contract with a PBM to negotiate payment rates with pharmacies, oversee preferred drug lists, and pay pharmacies for the drugs they dispense. The PBMs are not required to use the same payment rates that the state Medicaid agency uses to pay pharmacies for drugs delivered through a fee-for-service system, although they are required by law to pay pharmacies rates that are high enough to ensure appropriate access for the managed care enrollees.
State Medicaid agencies receive the rebates specified in the Medicaid drug rebate program directly from the manufacturers for drugs delivered through fee-for-service systems and managed care plans. Amounts collected under the federal rebate program are shared by the federal government and states partly on the basis of the federal medical assistance percentage, which is the share of Medicaid spending in each state paid by the federal government.
There are two components to the rebate defined in federal statute. The first, called the basic rebate, is the larger of either a flat rebate amount—currently 23.1 percent of the average manufacturer price (AMP) of a brand-name drug—or the difference between the AMP and the “best price” (the lowest net price extended to any private buyer, excluding Part D plans). In other words, if the brand-name drug manufacturer offers certain private-sector purchasers a rebate that exceeds 23.1 percent of the AMP, then the basic rebate received by Medicaid is increased to match that larger private-sector rebate. That rebate can make it more costly for manufacturers to offer discounts to buyers in the private sector and can result in higher prices there for some brand-name drugs, particularly those with a large market share in Medicaid.
The second part of the Medicaid rebate is based on the rate of increase in the AMP. If the AMP grows faster than overall inflation as measured by the consumer price index for all urban consumers (CPI-U), the excess amount of that growth is owed as an additional rebate. That inflation-based rebate ensures that the net prices manufacturers receive for drugs purchased by Medicaid beneficiaries do not increase faster than the rate of inflation. Federal law caps the sum of the basic rebate and the inflation-based rebate at 100 percent of the AMP.
In addition to the basic and inflation-based rebates, states and Medicaid managed care plans may negotiate for supplemental rebates beyond those statutory rebates by using preferred drug lists. Medicaid programs cover drugs that are not on preferred drug lists, but they often require step therapy or prior authorization for such drugs. Furthermore, to receive payment for drugs in Medicaid, drug manufacturers must participate in the 340B Drug Pricing Program, which is not included in the analysis in this report (see Box 1).
Box 1. The 340B Drug Pricing Program The 340B Drug Pricing Program requires drug manufacturers to give discounts on their outpatient drugs to certain hospitals and health centers, called covered entities, that serve low-income or underserved populations. All drug manufacturers that participate in Medicaid must also participate in the 340B program, which was created by the Veterans Health Care Act of 1992 as Section 340B of the Public Health Service Act. In 2010, eligibility for the 340B program expanded to include more kinds of facilities, such as critical access hospitals and rural referral centers, that provide health care services to people in remote areas. And because the proportion of Medicaid patients that a facility serves is a factor in determining its eligibility for the 340B program, expansions in Medicaid under the Affordable Care Act have also accelerated the program’s growth. Discounts in the 340B program apply to both self-administered drugs and physician-administered drugs, and covered entities can dispense drugs through in-house pharmacies, through community pharmacies with which they have contracts (referred to as contract pharmacies), or both. In 2010, the Department of Health and Human Services’ Health Resources and Services Administration (HRSA) changed its guidance to allow covered entities to use multiple contract pharmacies (instead of just one) to provide their 340B drugs. As a result, the number of contract pharmacies has grown substantially. Because of all of those changes, purchases at discounted 340B program prices, known as ceiling prices, have increased rapidly in recent years, from $12 billion in 2015 to $24 billion in 2018. The 340B ceiling price is the maximum price a manufacturer can charge for a drug in the 340B program. The ceiling price for each covered outpatient drug is the difference between the drug’s average manufacturer price and a rebate amount that is calculated using the Medicaid rebate formula. Covered entities may also negotiate prices lower than the 340B ceiling price. The discounts under the 340B program only affect the prices that covered entities pay manufacturers (that is, they do not directly affect the price paid by the beneficiary). Discounted prices within the 340B program represent the actual prices at which manufacturers must sell their drugs to covered entities and are intended to subsidize safety-net services, such as uncompensated care; however, covered entities receive those discounts on drugs dispensed to all of their patients, not just their low-income or uninsured ones. There are no restrictions on the prices that covered entities charge insurers, though covered entities are required to make certain that manufacturers are not charged duplicate discounts for drugs dispensed to Medicaid beneficiaries. Although systems are in place to prevent such duplicate discounts, the greater use of contract pharmacies and the larger number of Medicaid beneficiaries in managed care plans have made preventing them difficult. Some critics assert that the 340B program has become too large for HRSA to oversee.
State Medicaid programs must cover all prescription drugs made by manufacturers that have entered into a rebate agreement with CMS except for drugs that are used for certain conditions specified in federal law. Although most drug manufacturers choose to participate in the Medicaid drug rebate program, they are not obligated to do so. If a manufacturer chooses not to participate, states receive no federal Medicaid payment for any of that company’s drugs, and state Medicaid agencies may choose not to cover those drugs.
Direct Federal Purchasers
Some federal health care programs purchase prescription drugs directly from manufacturers or wholesalers and provide their own dispensing arrangements for patients. The four largest direct federal purchasers, collectively known as the Big Four agencies, are VA, DoD, the Public Health Service (including the Indian Health Service), and the Coast Guard. Other direct federal purchasers include the Bureau of Prisons, the Peace Corps, Immigration and Customs Enforcement, the National Aeronautics and Space Administration, and the Department of State. Prices for direct federal purchasers are determined through a combination of statutory rules and negotiation (see Figure 3).
Figure 3. Direct Federal Purchasers’ System for Buying Brand-Name Outpatient Prescription Drugs Data source: Congressional Budget Office. a. The Big Four price is the maximum price a drug manufacturer is allowed to charge the Big Four federal agencies, which are the Department of Veterans Affairs (VA), the Department of Defense (DoD), the Public Health Service (including the Indian Health Service), and the Coast Guard. It is the lower of the Federal Supply Schedule price and the federal ceiling price, minus any additional price concessions. VA and DoD often pay prices that are lower than the Big Four prices, primarily because they use national formularies of preferred drugs, they steer patients to lower-cost drugs, and they buy drugs in large volumes—all of which increase their negotiating leverage with drug manufacturers. b. This represents drugs dispensed from DoD military treatment facilities and the TRICARE mail-order pharmacy, but not dispensed through the TRICARE retail pharmacy network. c. The Public Health Service (PHS) includes the Indian Health Service. d. Included among the other direct federal purchasers are the Bureau of Prisons, the National Aeronautics and Space Administration, the Department of State, and other federal agencies and institutions. e. Federal Supply Schedule (FSS) prices are determined through a combination of statutory rules and negotiation between VA and drug manufacturers. f. The nonfederal average manufacturer price (non-FAMP) is the average price wholesalers pay manufacturers for drugs distributed to nonfederal purchasers, reflecting discounts but excluding any prices found by the Secretary of the VA to be merely nominal. g. The federal ceiling price (FCP) is equal to 76 percent of a drug’s non-FAMP in the previous year minus an additional amount if the non-FAMP grew more quickly than inflation as measured by the consumer price index for all urban consumers.
Federal Supply Schedule Prices. All direct federal purchasers have access to prices listed on the FSS, which are publicly reported prices determined by negotiation between VA (on behalf of all direct federal purchasers) and drug manufacturers. The FSS is intended to allow direct federal purchasers to buy brand-name drugs at prices equal to or below the lowest prices negotiated between manufacturers and their most-favored commercial customers, defined as the customers that receive the best discount or price agreement. Drug manufacturers must have their brand-name drugs listed on the FSS to sell them to direct federal purchasers or through the Medicaid program. During a multiyear contract period, an FSS price may not increase faster than the net price charged to the most-favored commercial customer.
Although prices on the FSS are available to all direct federal purchasers, agencies using the FSS to buy prescription drugs do not necessarily pay those prices. Manufacturers routinely offer direct purchasers discounts called temporary price reductions, which can be extended to a single purchaser, multiple purchasers, or all purchasers that use the FSS.
Big Four Agencies. Under the FCP program, VA, DoD, the Public Health Service, and the Coast Guard can obtain certain statutory discounts that can bring their prices below those on the FSS. Those further discounts are based on prices that manufacturers selling prescription drugs to direct federal purchasers are required to report to VA. The nonfederal average manufacturer price (non-FAMP) is the average price paid to manufacturers by wholesalers for drugs distributed to nonfederal purchasers, reflecting discounts but excluding any prices found by VA to be merely nominal (for example, in the case of drugs delivered to charities). The non-FAMP is used to set a cap—the FCP—on how much manufacturers can charge the Big Four. The FCP is equal to 76 percent of a drug’s non-FAMP in the previous year, minus an additional amount if the non-FAMP grew more quickly than the CPI-U during the previous one-year period.
The Big Four price for a particular drug—the maximum price a drug manufacturer is allowed to charge the Big Four agencies—is the lower of the FSS price or the FCP. In many cases, the Big Four agencies can pay even lower prices if they benefit from a temporary price reduction of the FSS price or, in the case of VA and DoD, if they use formularies of preferred drugs and other means, as discussed below.
Department of Veterans Affairs. VA purchases prescription drugs directly through a wholesaler, known as a prime vendor, that is selected through a competitive bidding process. VA operates an integrated health care delivery system that generally provides health care benefits directly to enrolled veterans at its medical facilities and also through agreements with community providers. Patients usually obtain their prescription drugs by mail or at pharmacies in VA medical facilities.
VA obtains discounts in many cases that lead to prices lower than the Big Four price. Those discounts result primarily from VA’s use of its national formulary, in which the agency agrees to the preferred or exclusive use of certain drugs, within a class of drugs, on the basis of safety, efficacy, and price. VA has direct administrative influence over health care providers in its integrated system, so in many cases it is well positioned to strongly encourage the use of a preferred drug. Manufacturers are often willing to make major price concessions not only to achieve a higher sales volume from VA but also because VA facilities train many medical residents and fellows, and inclusion on the formulary could influence future prescribing behavior outside VA. In addition to discounts from manufacturers, VA also receives discounts from its prime vendor for prompt payment.
Department of Defense. TRICARE is DoD’s health care program for active-duty service members and their families, military retirees and their families, and certain other beneficiaries. Under the TRICARE program, beneficiaries can fill prescriptions at military treatment facilities, through the TRICARE mail-order pharmacy (TMOP), at pharmacies in the TRICARE retail pharmacy network, or at nonnetwork pharmacies. DoD has access to the Big Four prices (as described above). Like VA, it can obtain further discounts by using preferred drug formularies, and its prime vendors are selected through a competitive bidding process.
DoD is a direct federal purchaser (through its prime vendors) of drugs dispensed through MTFs and TMOP but not of drugs dispensed through the TRICARE retail pharmacy network. In the latter program, DoD reimburses community pharmacies that dispense drugs to TRICARE enrollees. The 2008 National Defense Authorization Act requires drugs dispensed through the TRICARE retail pharmacy network to be treated as if they were purchased by DoD, and therefore they must be priced according to the rules of the FCP program. Drugs sold through that network are subject to mandated refunds from manufacturers. Those refunds, akin to rebates in other programs, are calculated as the difference between the annual non-FAMP and the FCP, plus any further discounts provided by the manufacturer to receive preferred formulary placement for drugs in certain therapeutic classes. However, DoD generally pays higher net prices for drugs dispensed through the TRICARE retail pharmacy network than for those dispensed through MTFs or TMOP. In fiscal year 2017, prescriptions dispensed through TMOP accounted for 50 percent of DoD’s total spending on outpatient prescription drugs in TRICARE, compared with 23 percent for prescriptions dispensed through MTFs and 27 percent for prescriptions dispensed through retail pharmacies.
How Drug Prices in Different Segments of the Market Are Related
The methods used to determine prescription drug prices in federal programs can affect drug manufacturers’ decisions about the list prices and rebates they offer in the private sector. Those decisions, in turn, can affect net prices paid in some federal programs. For example, the best-price component of the Medicaid rebate makes it more costly for drug manufacturers to offer large discounts to private payers because the manufacturers would have to offer the same discounts to Medicaid if those discounts exceeded 23.1 percent of the AMP. An analysis by CBO found that the introduction of the Medicaid drug rebate program in 1991 increased the net prices paid by some private payers. Another analysis found that the Medicaid drug rebate program raises private payers’ prices for drugs when sales through Medicaid are a large share of the drugs’ total sales. The policies that determine prices for direct federal purchasers may have a similar effect on prices in the private sector.
The inflation-based component of the Medicaid rebate discourages drug manufacturers from raising the AMP faster than the CPI-U once a drug is on the market. It also encourages them to set higher prices for new drugs than they otherwise would.
The price comparisons in this report do not indicate what prices would result if one federal program adopted the pricing approach currently used by another program, because changes to current laws or regulations could alter manufacturers’ overall pricing choices. To analyze the effects of such changes in law, CBO would account for likely changes in manufacturers’ pricing decisions.
How Brand-Name Drug Prices Vary Among Federal Programs
The prices of brand-name prescription drugs vary greatly by program. Among the federal programs in this analysis, the lowest average net prices were paid in Medicaid because of the large rebates obtained from manufacturers, as specified by law. Direct federal purchasers such as VA and DoD, whose prices are determined by a combination of statutory rules and negotiations, generally paid higher net prices than those in Medicaid. The highest net prices were paid in Medicare Part D, which relies primarily on market forces similar to those in the commercial market to determine prices.
CBO compared prices among programs for two samples of brand-name drugs: 176 top-selling drugs and 64 high-priced drugs. The agency also analyzed prices separately for specialty and nonspecialty drugs among the sample of top-selling brand-name drugs. Specialty drugs typically treat chronic, complex, or rare conditions, frequently have high prices, and may require special handling or patient monitoring. CBO analyzed the prices of specialty drugs separately because they have accounted for a growing share of new drugs introduced to the market in recent years and they are generally introduced at much higher prices than nonspecialty drugs.
For each program, CBO constructed prices per standardized prescription, which roughly corresponds to a 30-day supply of medication. For each sample of drugs, the agency computed a weighted-average price for each program by using quantities sold in Part D as a common set of weights.
Federal Programs in Which Drugs Are Dispensed at Retail Pharmacies
In 2017, average net prices of drugs in Medicare Part D were higher than those in DoD’s TRICARE retail pharmacy network, and average net prices of drugs in both programs were substantially higher than those in Medicaid.
Top-Selling Drugs. The average net price per standardized prescription for the sample of 176 top-selling brand-name drugs was $343 in Medicare Part D, which was nearly three times higher than the average net price ($118) in Medicaid and 26 percent higher than the average net price ($272) in the DoD TRICARE retail pharmacy network (see Table 2). The average retail price was similar in Medicare Part D and Medicaid, but the average net price was much higher in Medicare Part D because the rebates and discounts in that program were smaller than those in Medicaid. Rebates and discounts for the sample of top-selling drugs averaged 35 percent of the retail price in Medicare Part D. In Medicaid, rebates totaled 77 percent of the retail price—split roughly evenly between the basic rebate and the additional inflation-based rebate. Net prices in the TRICARE retail pharmacy network were lower than in Medicare Part D because the former is subject to Big Four pricing and receives additional refunds.
Table 2. Average Prices per Standardized Prescription for Brand-Name Drugs in Selected Federal Programs, 2017 Dollars Data source: Congressional Budget Office, using data from the Centers for Medicare & Medicaid Services, the Department of Veterans Affairs, the Department of Defense, and Truven Health Analytics (now part of IBM Watson Health). See www.cbo.gov/publication/56978#data. AMP = average manufacturer price; AWP = average wholesale price; DoD = Department of Defense; FCP = federal ceiling price; FSS = Federal Supply Schedule; MTF = military treatment facility; non-FAMP = nonfederal average manufacturer price; TMOP = TRICARE mail-order pharmacy; VA = Department of Veterans Affairs; WAC = wholesale acquisition cost. a. The Big Four are the four largest direct federal purchasers of prescription drugs (VA, DoD, the Public Health Service, and the Coast Guard). b. The best price is the lowest net price at which a drug is offered to any private buyer. It is used to compute rebates in the Medicaid program.
Prices were much higher for specialty drugs than for nonspecialty drugs in each program. For example, among the sample of top-selling drugs, the average net price per standardized prescription in Medicare Part D was $4,293 for specialty drugs and $184 for nonspecialty drugs. The average net price for both categories of drugs was greater in Medicare Part D than in the TRICARE retail pharmacy network, and it was substantially lower in Medicaid than in either of those programs. For specialty drugs, the average net price per standardized prescription was more than twice as high in Medicare Part D as in Medicaid ($4,293 versus $1,889). For nonspecialty drugs, the difference in average net price between the two programs was nearly fourfold ($184 in Medicare Part D versus $47 in Medicaid).
Rebates and discounts constituted a smaller percentage of retail prices for specialty drugs than for nonspecialty drugs in both Medicare Part D and Medicaid, although in each case those percentages were much smaller in Part D than in Medicaid. In Medicare Part D, rebates and discounts averaged 12 percent of the retail price for specialty drugs and 47 percent of the retail price for nonspecialty drugs. That large difference is attributed to negotiations between Part D plans and manufacturers that generally result in greater rebates when drugs have multiple close substitutes, which occurs more frequently for nonspecialty drugs.
The rebates in Medicaid, as a percentage of retail prices, were smaller for specialty drugs than for nonspecialty drugs (60 percent versus 86 percent) for two reasons that relate to the two components of the Medicaid rebate. First, the inflation-based component of the Medicaid rebate was, on average, lower (as a percentage of the retail price) for specialty drugs than for nonspecialty drugs. The inflation-based component of the rebate averaged 31 percent of the retail price in Medicaid for specialty drugs and 43 percent for nonspecialty drugs. That difference partly reflects the fact that most specialty drugs were introduced after nonspecialty drugs. Second, the basic rebate is also lower as a percentage of the retail price for specialty drugs (averaging 29 percent) than for nonspecialty drugs (averaging 43 percent). That difference reflects the fact that rebates for private payers tend to be lower for specialty drugs than for nonspecialty drugs, for the reason given above. As a result, the difference between the AMP and the best price is smaller for specialty drugs than for nonspecialty drugs, so the basic rebate for specialty drugs is less likely to exceed 23.1 percent of the AMP. For the sample of top-selling drugs, the best price was, on average, 24 percent lower than the AMP for specialty drugs and 51 percent lower than the AMP for nonspecialty drugs.
The average value of the AMP among the sample of 176 top-selling drugs was $509 (slightly less than their average retail price), and the average best price for those drugs was $298. The AMP is intended to reflect the average price manufacturers receive for prescription drugs, but because of details about how the AMP is calculated, it may not always do so. For example, sales to mail-order pharmacies and prompt-pay discounts that manufacturers give to wholesalers are excluded from the calculation. In addition, the regulations specifying how manufacturers should compute the AMP and the best price are complex, and manufacturers have used varying assumptions in following them.
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The average wholesale acquisition cost for the sample of 176 top-selling brand-name drugs was $558 per standardized prescription—6 percent higher than the average retail price of those drugs in Medicare Part D. As discussed previously, wholesalers typically purchase drugs from manufacturers at a negotiated discount from the amount of the WAC. The AWP, another list price that is sometimes used as a starting point in business-to-business negotiations in the pharamaceutical industry, averaged $670 for the 176 top-selling brand-name drugs—28 percent higher than the average retail price of those drugs in Medicare Part D.
High-Priced Drugs. The average net price for the sample of high-priced drugs was $11,484 per standardized prescription in Medicare Part D, which was nearly double the average net price in Medicaid ($5,841) and 46 percent higher than the average net price in the TRICARE retail pharmacy network ($7,849). The average retail price for those drugs was similar in Medicare Part D and in Medicaid, but the average net price was much higher in Part D because the rebates and discounts in that program averaged 11 percent of the retail price, whereas rebates in Medicaid averaged 53 percent of the retail price. The Medicaid rebates for high-priced drugs consisted of basic rebates averaging 29 percent of the retail price and inflation-based rebates averaging 24 percent of the retail price. CBO did not analyze specialty drugs separately for the sample of high-priced drugs, because 56 of the 64 drugs included in that sample were specialty drugs.
Direct Federal Purchasers
The prices that direct federal purchasers pay for brand-name prescription drugs also vary considerably by program. FSS prices in 2017 were higher than the Big Four prices, and both of those prices were substantially higher than those in VA’s and DoD’s prime vendor programs (the latter including drugs dispensed at MTFs and through TMOP but not those dispensed through the TRICARE retail pharmacy network or nonnetwork retail pharmacies).
Top-Selling Drugs. The average FSS price for the sample of 176 top-selling brand-name drugs was $317 per standardized prescription. The average Big Four price for those drugs was $273, 14 percent lower than the average FSS price. The average FSS price was $3,377 for specialty drugs and $194 for nonspecialty drugs. The average Big Four price was $2,804 for specialty drugs (17 percent lower than the average FSS price) and $171 for nonspecialty drugs (12 percent lower than the average FSS price).
In the VA prime vendor program, the average price among the sample of top-selling brand-name drugs was $190, which was similar to the average prices paid for drugs dispensed by DoD at MTFs and through TMOP ($184). Those average prices were about a third lower than the average Big Four price. As described above, VA and DoD can negotiate lower prices than the Big Four prices for their direct purchases. That is mainly because of the large volume of drugs they buy and their ability to influence which drugs are prescribed by physicians they employ. The average price for specialty drugs in the VA prime vendor program was $2,002; it was $117 for nonspecialty drugs. Each of those prices was about 30 percent lower than the respective average Big Four price. Similarly, the average price for specialty drugs dispensed at MTFs and through TMOP was $2,094; it was $107 for nonspecialty drugs.
The average non-FAMP for the sample of 176 top-selling drugs was $458, about 10 percent lower than the average AMP for those drugs ($509). The non-FAMP and the AMP are each intended to reflect the average price that manufacturers receive for brand-name drugs, but they differ because of differences in the details of how they are calculated.
High-Priced Drugs. The average FSS price for the sample of 64 high-priced brand-name drugs was $9,951, and the average Big Four price was $8,138 (18 percent lower than the FSS price). The average price for those drugs in the VA prime vendor program was $5,848 (72 percent of the Big Four price), and DoD’s average price for drugs dispensed through its prime vendor program (at MTFs and through TMOP) was $6,131 (75 percent of the Big Four price).
Considerations for Comparing Prices Among Programs
The average prices reported for the direct federal purchasers are not directly comparable with the average prices reported for programs in which drugs are dispensed at retail pharmacies for two reasons. First, the prices for the latter set of programs include the amounts retained by pharmacies to cover their costs of dispensing drugs plus their profits on those transactions. In contrast, the average FSS and Big Four prices, as well as those for the VA and DoD prime vendor programs, do not include the costs of dispensing drugs. Adjusting the estimates to account for that difference would not change the finding that the average prices in the VA and DoD prime vendor programs are higher than the average net price in Medicaid and lower than the average net price in Medicare Part D. The best available evidence indicates that the amount retained by pharmacies accounts for between 3 percent and 6 percent of retail spending on brand-name prescription drugs. If those estimated amounts retained by pharmacies are removed from the average net price in Medicare Part D (to make that estimate more comparable with the estimated direct purchaser prices), that price is reduced by between 5 percent and 9 percent, resulting in an average net price ranging from $311 to $327 for the sample of top-selling drugs. Removing the amount retained by pharmacies from the average net price in Medicaid would reduce that price and widen the gap between the average price in Medicaid and the average prices paid by VA and DoD.
The second reason that the estimated prices for the two sets of federal programs are not directly comparable is that the prices at which drugs are dispensed at retail pharmacies include the amount retained by wholesalers, which is generally about 1 percent of retail spending on brand-name prescription drugs. VA and DoD have negotiated so-called negative distribution fees with their prime vendors, which are, in effect, discounts based on the costs of ordered drugs. Those discounts are incorporated in the estimated prices presented in this report, so no adjustment is needed to make the prices for the VA and DoD prime vendor programs comparable with the other prices.
Comparing Relative Prices Among Federal Programs
Expressing the average price in each program (net of applicable rebates and discounts) relative to the average net price in Medicare Part D illustrates the degree of variation in prices among programs. For top-selling drugs, the average net price in Medicaid was 35 percent of the average net price in Medicare Part D, and the average price in the VA and DoD prime vendor programs was about 55 percent of the average net price in Medicare Part D (see Figure 4). (The estimates in Figure 4 have not been adjusted to account for the fact that markups by pharmacies and wholesalers are included in some prices but not in others.) The average FSS price for top-selling drugs, which is similar to the lowest net price offered to commercial buyers, was 93 percent of the average net price in Medicare Part D.
Figure 4. Average Price of Top-Selling Brand-Name Drugs As a Percentage of Their Average Net Price in Medicare Part D, 2017 Percent Data source: Congressional Budget Office, using data from the Centers for Medicare & Medicaid Services, the Department of Veterans Affairs, the Department of Defense, and Truven Health Analytics (now part of IBM Watson Health). See www.cbo.gov/publication/56978#data. DoD = Department of Defense; VA = Department of Veterans Affairs. a. The estimates shown for Medicaid and the DoD TRICARE retail pharmacy network are based on net prices in each program. b. The Big Four are the four largest direct federal purchasers of prescription drugs (the Department of Veterans Affairs, the Department of Defense, the Public Health Service, and the Coast Guard).
In DoD’s TRICARE program, the average price paid for drugs dispensed at MTFs or through TMOP was about one-third lower than the average price for drugs sold through the TRICARE retail pharmacy network. That difference in price might be largely attributable to the fact that DoD has greater control over the variety of medications dispensed at MTFs and through TMOP than through the retail pharmacy network, and therefore has greater leverage when negotiating direct purchase prices. Another factor contributing to the difference in average prices is that DoD receives a discount from its prime vendors in the form of a negative distribution fee for drugs dispensed at MTFs or through TMOP but receives no such discount for drugs dispensed at retail pharmacies. The average retail pharmacy price was also very close to the average Big Four price. Because retail pharmacy prices include pharmacy and wholesaler markups but Big Four prices do not, that finding suggests that manufacturers are paid slightly less than the Big Four price, on average, for drugs dispensed in the TRICARE retail pharmacy network.
Distributions of Selected Prices Relative to Medicare Part D and Big Four Prices
Two-thirds of the drugs in the sample of top-selling drugs had an estimated net price in Medicaid that was less than half of their net price in Medicare Part D. Nearly a quarter of the drugs in the sample had an estimated net price in Medicaid that was between zero and 5 percent of the net price in Medicare Part D (see Table 3). The large number of drugs with net prices near zero in Medicaid reflects the unique characteristics of the Medicaid rebate, which rises both with growing differences between list and net prices in the commercial market and with increasing list prices over time. Drug manufacturers that have made pricing decisions that resulted in a net price close to zero in Medicaid for a particular drug have calculated that the increased revenue from other payers more than offsets the loss in revenue from Medicaid. Prices do not approach zero in other programs, either because they are negotiated by the manufacturer or because, in the case of the Big Four price, they are set by a formula that prohibits the price from being zero.
Table 3. Distribution of the Ratios of Drug Prices to the Net Price in Medicare Part D and to the Big Four Price Percent Data source: Congressional Budget Office, using data from the Centers for Medicare & Medicaid Services, the Department of Veterans Affairs, the Department of Defense, and Truven Health Analytics (now part of IBM Watson Health). See www.cbo.gov/publication/56978#data. Percentages indicate the fraction of products in each sample for which the indicated ratio is within the indicated range. The sample of top-selling drugs contains 176 drugs, and the sample of high-priced drugs contains 64 drugs. DoD = Department of Defense; FSS= Federal Supply Schedule; VA = Department of Veterans Affairs. a. The Big Four price is the price available to the Big Four agencies (the four largest direct federal purchasers), consisting of VA, DoD, the Public Health Service, and the Coast Guard. That price is the minimum of the FSS price and the federal ceiling price. VA and DoD often pay lower prices than the other Big Four agencies because they use formularies (preapproved lists) of preferred drugs, they steer patients to lower-cost drugs, and they buy drugs in large volumes. b. The DoD TRICARE retail price refers to the average net price of drugs dispensed through the TRICARE retail pharmacy network. c. The DoD prime vendor price refers to the average price of drugs dispensed at military treatment facilities and through the TRICARE mail-order pharmacy.
The distributions of relative prices were different for other federal programs. Prices in DoD’s TRICARE retail pharmacy network, FSS prices, and Big Four prices were less than half of the corresponding net price in Medicare Part D for between 9 percent and 11 percent of the drugs in the sample of top-selling drugs. And although Medicare Part D had the highest average net prices among the programs that CBO studied, the FSS price exceeded those prices for 36 percent of the drugs in the sample, as did the price in DoD’s TRICARE retail pharmacy network for 28 percent of drugs in the sample, and the Big Four price for 27 percent of them. Relative to the net price in Medicare Part D, the distributions of prices paid by VA and DoD through their direct purchases (that is, through their prime vendor programs) mostly fell between the distribution of prices in Medicaid and the distribution of Big Four prices. DoD’s direct purchase prices were between one-quarter and three-quarters of the net price in Medicare Part D for 70 percent of the drugs in the sample, and prices paid by VA fell within that range for 61 percent of the drugs in the sample.
CBO also analyzed the ratio of VA and DoD direct purchase prices to the Big Four price. As Big Four agencies, both VA and DoD are entitled to buy drugs at the Big Four price, but as discussed above, they paid average prices that were between 67 percent and 70 percent of the average Big Four price for top-selling drugs. However, the distributional analysis reveals that for the majority of drugs in the sample of top-selling drugs, those agencies actually paid prices for their direct purchases that were closer to the Big Four price than the comparison of average prices would suggest. The price paid by VA exceeded three-quarters of the Big Four price for 73 percent of the drugs in the sample, as did the average price paid by DoD for 67 percent of those drugs.
Moreover, one of the reasons VA and DoD paid less than the Big Four price is that those agencies receive discounts from their prime vendors in the form of negative distribution fees. Those discounts are applied to the contract prices negotiated between those agencies and the manufacturers. In addition to the prices they paid to their prime vendor, VA reported the amount of the negative distribution fee for each drug to CBO. Using that information, CBO calculated the contract prices negotiated between VA and the manufacturer and found that VA’s contract price was actually equal to the Big Four price for 104 of the 176 drugs in the sample of top-selling drugs. Although CBO does not know the amount of the negative distribution fee that applied to DoD’s direct purchases, it is likely that in many cases the negotiated contract price is equal to the Big Four price in that program as well. For 102 of the drugs in the sample of 176 top-selling drugs, DoD paid its prime vendors between 85 percent and 95 percent of the Big Four price.
An examination of the price distributions among the sample of high-priced drugs in Medicare Part D reveals some of the same patterns observed in the sample of top-selling drugs. One significant difference between the samples of top-selling and high-priced drugs is that prices in the latter were less dispersed relative to the net price in Medicare Part D. For example, the FSS price was greater than the net price in Medicare Part D for 13 percent of the drugs in the sample of high-priced drugs, compared with 36 percent of the drugs in the sample of top-selling drugs. Another difference is that only 5 percent of drugs in the sample of high-priced drugs had net prices in Medicaid that were less than 5 percent of their corresponding prices in Medicare Part D, compared with 23 percent of drugs in the sample of top-selling drugs.
Comparison With Earlier Estimates of Drug Prices in Selected Federal Programs
This report is an update to a report published by CBO in 2005, which compared drug prices in selected federal programs using a sample of the top-selling brand-name prescription drugs in 2003. Although the methods used to estimate the 2003 drug prices differ somewhat from those used in this report, they are similar enough to illustrate how the price differences among the various federal programs have changed since then.
Because the FSS price is present in both this report and the report published in 2005, it can be used to compare their results. In 2017, the average net price in Medicaid was by far the lowest in all the federal programs examined: 37 percent of the average FSS price (see Figure 5). The next lowest prices were those paid by DoD (58 percent of the FSS price) and VA (60 percent) in their prime vendor programs. By contrast, in 2003, the average net price in Medicaid was only slightly lower than the FSS price (96 percent of that price), and the lowest average prices were paid by DoD (77 percent of the FSS price) and VA (79 percent). Another difference is that the prices paid by VA and DoD in their prime vendor programs were lower relative to the Big Four price in 2017 than in 2003.
Figure 5. Average Prices of Brand-Name Outpatient Prescription Drugs in Selected Federal Programs As a Ratio of the Federal Supply Schedule Price Data sources: For 2017 estimates, Congressional Budget Office, using data from the Centers for Medicare & Medicaid Services, the Department of Veterans Affairs, the Department of Defense, and Truven Health Analytics (now part of IBM Watson Health); for 2003 estimates, Congressional Budget Office, Prices for Brand-Name Drugs Under Selected Federal Programs (June 2005), www.cbo.gov/publication/16634. See www.cbo.gov/publication/56978#data. Estimates for 2003 are based on a sample of 130 top-selling brand-name drugs in that year; estimates for 2017 are based on a sample of 176 top-selling brand-name drugs in that year. Medicare Part D was not fully implemented until 2006, so no estimate is available for 2003. a. Federal Supply Schedule (FSS) prices are determined through a combination of statutory rules and negotiation between the Department of Veterans Affairs (VA) and drug manufacturers. b. Net prices in Medicaid were estimated differently for the two years. For 2003, net prices were estimated by subtracting rebates from average manufacturer prices; for 2017, net prices were estimated by subtracting rebates from retail prices. c. The 2003 estimate for the Department of Defense (DoD) is based on drugs dispensed at military treatment facilities; the 2017 estimate includes drugs dispensed at military treatment facilities and through the TRICARE mail-order pharmacy. For both years, the estimate excludes prices paid for drugs purchased at network or nonnetwork retail pharmacies. d. The estimate represents the prices available to the Big Four agencies (the four largest direct federal purchasers), consisting of VA, DoD, the Public Health Service, and the Coast Guard. That price is the minimum of the FSS price and the federal ceiling price. VA and DoD often pay lower prices than the other Big Four agencies because they use formularies (preapproved lists) of preferred drugs, they steer patients to lower-cost drugs, and they buy drugs in large volumes. e. The estimate for Medicare Part D is based on net prices in that program.
CBO has not fully analyzed the factors underlying those differences. However, increases in the amounts of Medicaid rebates paid by drug manufacturers are likely an important reason that net prices in Medicaid are now lower than prices paid by VA and DoD. In 2003, the average Medicaid rebate on brand-name drugs was 35 percent of the AMP. In 2017, the average Medicaid rebate for the sample of top-selling brand-name drugs included in this report was 78 percent of the AMP. During the intervening period, the basic and inflation-based rebates for brand-name drugs both increased, on average. The increase in the average basic rebate is partly attributable to a change in law. In 2003, the basic Medicaid rebate for a brand-name drug was the larger of the flat rebate of 15.1 percent of the AMP or the difference between the AMP and the best price extended to any private buyer. The ACA increased the flat rebate amount to 23.1 percent of the AMP, reducing average net prices paid by Medicaid. The average inflation-based rebate increased because the AMP of brand-name prescription drugs grew faster than the CPI-U.
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