Public Contract Law Journal

Medicare Part D: Buying Prescription Drugs Wholesale but Paying Retail

by Meghan McConnell

Meghan McConnell (mmcconnell@law.gwu.edu) is a third-year law student at The George Washington University Law School and the Senior Notes Editor of the Public Contract Law Journal. She would like to thank Professor Sonia Tabriz, Sophia Herbst, and Danielle Bereznay for their support throughout this process. Most importantly, she would like to thank her fiancé for his unwavering love and support.

I.   Introduction

Across the country, patients with severe illnesses are delaying treatment, cutting pills in half, or skipping pills altogether because they cannot afford the cost of medication.1 When John Krahne was diagnosed with lung cancer in December 2016, he faced an impossible decision: pay over $6,000 in copayments immediately and start treatment now or wait until January and pay only $3,000.2 Mr. Krahne chose to wait.3 For millions of Americans, even those with health insurance, the cost to treat many illnesses is untenable, easily creeping up to tens of thousands of dollars in out-of-pocket expenses.4 Reflecting on his decision to stall treatment, Mr. Krahne said, “We hope it doesn’t hurt my chance of cure.”5 His story is not unique.

Although U.S. consumers remain outraged over the high price of many prescription drugs, pharmaceutical companies defend their actions by citing the cost of bringing a new drug to market.6 However, U.S. consumers consistently see pharmaceutical prices higher than other countries for the same drugs, largely because manufacturers have few restrictions in setting prices.7 The U.S. drug pricing market is one of the least restrictive in the world, allowing pharmaceutical companies to charge higher prices in the domestic market to compensate for lower prices elsewhere.8 And, unlike some countries with national health insurance programs and uniform drug pricing controls,9 the United States has both government-facilitated health insurance plans and a private market, which negotiate separately with manufacturers.

Prescription drugs account for ten percent of the total health spending in the United States.10 The federal government is the largest buyer in the health care market,11 spending nearly $1.5 trillion annually on health care.12 In 2016, spending on prescription drugs was a staggering $348 billion,13 with the federal government paying approximately forty percent of the cost.14 In addition, Medicare Part D (“Part D”) spending nearly doubled between 2007 and 2015, from $46 billion to $80 billion.15 The cost to consumers is unsustainable for many. Someone with a chronic illness will pay an average of $11,000 for a year’s supply of prescriptions — more than double the cost in 2006.16

A major factor contributing to high drug prices is the introduction of new drugs to the market.17 In late 2013, the Food and Drug Administration (FDA) approved Gilead Pharmaceuticals’ revolutionary hepatitis C cure, Sovaldi.18 In 2014, total U.S. spending on Sovaldi was $7.9 billion, more than the total spent to treat hepatitis C over the previous three years.19 Gilead received criticism and congressional scrutiny for this drug, which averages $84,000 per treatment in the United States.20  But the rise in prescription drug prices is  not isolated to new treatments. Even drugs that have been on the market for decades continue to increase in price.21 Between 2008 and 2016, prices of popular brand-name drugs rose by 208%.22 Since 2002, the price of insulin has tripled, with no remarkable change in the cost of manufacturing.23 The EpiPen, which is used to treat anaphylactic shock by injecting a dose of epinephrine directly into the body,24 has increased in price fifteen times between 2009  and 2016, ultimately swelling to 400%.25 But it is not only the price tag that  is outrageous: consumers in the United States see prices higher than other developed countries. A Senate Finance Committee Investigation found that the price for Sovaldi in the European Union would be discounted twenty-five percent from the cost in the United States.26 Similarly, in Canada, the same treatment costs $34,000 less than in the U.S. market.27

 

The federal government authorizes, administers, and funds several federal health programs for targeted populations. But Part D is the only government- subsidized health program in which the government cannot directly influence prescription drug costs, despite paying for a substantial portion of the program.28 President Donald Trump has said on several occasions that the Centers for Medicare and Medicaid Services (CMS) should create new bidding procedures for the drug market,29 and a recent poll indicates that eighty-two percent of U.S. consumers agree that the government should negotiate drug prices for Part D.30 

Several factors, including the relatively hands-off approach to Part D drug pricing, disadvantage the government at the negotiating table. The main challenge that regulators and Congress face is finding a workable solution that controls costs to the government and consumers without stifling innovation, which ultimately harms patients. The rising cost of prescription drugs, particularly within government-funded health insurance programs, is an issue the federal government will need to face head on. This Note focuses on applying to Part D the cost-control contracting mechanisms used by other government health plans — specifically, the national formularies used by the U.S. Department of Veterans Administration (VA), standardized price ceilings, and statutory rebates used in Medicaid. Any solution must carefully balance costs, patient access, and care and continue to promote research and development so patients can access new and diverse drugs that are potentially more effective.

Part I of this Note summarizes the factors contributing to high drug prices in the U.S. market. Part II will provide a background of the Part D program and argue that the federal government cannot effectively control costs, despite paying for most of the bill. Part III will analyze possible applications of the VA’s Federal Supply Schedule (FSS), price ceiling, and Medicaid rebates on the Part D program. Part IV concludes by arguing that, although any of these solutions may provide the federal government with some cost savings, they could potentially harm beneficiaries by reducing access to certain prescriptions or newer and more effective drugs.

II.  The State of Drug Pricing & Govenment Health Insurance Programs

Several factors help explain the high cost of pharmaceuticals in the United States. Input costs for manufacturers — including (1) the cost  of  research and development,31 (2) the FDA approval process,32 and (3) the patent system33  — are increasingly expensive and time-consuming. Costs associated with these three barriers to entry largely are connected to the high cost of prescription drugs in the private market and government-facilitated programs.34 Although these factors help explain high prices for all insurance providers, the variance in spending among government programs is due to statutory differences in how the programs contract with manufacturers. The VA and Medicaid have been able to effectively leverage their purchasing power through direct negotiations and statutory advantages, while Part D lacks similar tools to obtain savings.35

A.      Drug Pricing Factors

Many factors affect the cost of pharmaceuticals in the United States. First, the cost of the research and development required to bring a new drug to market is increasingly expensive.36 In addition, to bring a drug to market, pharmaceutical companies must go through a rigorous FDA approval process.37 Finally, although the U.S. patent system provides twenty years of market exclusivity for a valid patent, the patent begins when the application is filed, which rarely coincides with the product’s entry to the market.38 The patent usually is filed at the early stages of development, and a new drug must undergo rigorous clinical trials before being  approved  for  market, meaning several non-profitable years of patent exclusivity are tied up in the FDA approval process.39

1.   Costs Associated with Research and Development

The pharmaceutical industry spends over $50 billion annually on research and development, or fifteen to twenty percent of the industry’s revenue.40 On average, research and development of a single new prescription drug takes twelve years41 and can cost hundreds of millions of dollars, with some estimates hovering around $1 billion.42 This price considers the cost of failure and forgone profits from capital tied up in current research and development.43 Some point out that the cost of manufacturing most drugs is significantly lower than the cost of development.44 However, the likelihood of success in getting a drug to market is less than twelve percent.45 To make up for the costs associated with research and development, drug companies may charge higher market entry prices for innovative treatments during market-exclusivity.46

In addition, shifting market research to specialty drugs with few substitutes will continue to pressure government-facilitated and privately run insurance companies, especially Part D.47 Big pharmaceutical companies have shifted their research from treatment-based care to drugs that manage chronic conditions.48 Because drugs that treat chronic conditions are taken over a long period, they undergo longer FDA approval periods, which increases research and development costs.49 If drug manufacturers expect to make less in profits due to government-imposed market controls, they might be incentivized to change their research and development approach.50 If a high-risk project would not yield the high rewards to which drug companies are accustomed, they might not take on development of innovative and more effective treatments.51 Thus, patients risk losing out on potentially more effective drugs.

2.   Food and Drug Administration Approval

To bring a drug to market in the United States, a manufacturer must obtain FDA approval.52 The FDA approval process is lengthy and complex, but it is necessary to ensure drugs are safe and effective for consumers.53

A new drug first undergoes an investigational new drug (IND) application, under which the FDA reviews its safety and efficacy.54 The FDA evaluates proposed clinical testing and the results from animal testing and prior research; then the drug proceeds to clinical testing phases I through III.55 Finally, the FDA reviews all the information to determine whether the drug is safe and effective, labeling is appropriate, and manufacturing methods will maintain the drug’s quality and purity.56 The FDA approval process takes twelve years on average.57 Since the twenty-year market-exclusivity clock begins the date the patent is filed, pharmaceutical companies typically have less time to make up the cost of research and development, increasing the importance of maximizing profits and incentivizing companies to do so during market exclusivity.58

3. Patent Laws and the Hatch-Waxman Act

The federal government permits owners of original ideas and inventions to maintain a temporary monopoly over the market.59 This temporary monopoly fills the need for financial reward to incentivize further innovative research.60 Vigorous debate surrounds the policy, but current patent law provides the owner of a valid patent with twenty years of market exclusivity from the date the patent application is filed.61 During this period of market exclusivity, the lack of a generic or competitive alternative enables the monopoly holder to set an unchallenged price. In 1984, Congress passed the Hatch-Waxman Act62 to increase the availability of generic alternatives in the market, which drives down prices by creating competition. The expected price of a drug with fifteen competitors is half the price of a drug with only three competitors.63

The Hatch-Waxman Act provides an abbreviated FDA approval process for a generic drug that is the biological equivalent of an existing drug,64 which accelerates the timeline for getting the generic to market. This is important because when a generic drug enters the market, the sales of on-brand equivalent drugs drop significantly, leading to savings for the insurer and patients.65 Although the consumer saves money with the introduction of a generic, the branded drug loses market share and profits, which further explains why manufacturers have an incentive to increase market entry prices.

Before a new drug can go to market, it must undergo a lengthy approval process through the FDA, which consumes much of the market exclusivity period. This shortened period of market exclusivity limits the time a manufacturer can recoup the upfront costs of research and development.66 To account for this short time frame, manufacturers generally increase prices by five percent per year during the period of market exclusivity.67 Within a year of the market entrance of a generic, the branded manufacturer loses significant market share to the lower-cost alternative.68 For example, in the first month after Prozac’s patent expired, Prozac lost eighty percent of their market share.69

Finally, the Act granted a 180-day generic-exclusive period for the first company to file a generic equivalent of an existing brand named drug.70 The first-to-file right can only belong to one generic manufacturer, and, should that company choose not to exercise its right, no other generic can enter the market during that period.71 Contrary to the goals of the competitive market, drug manufacturers often engage in pay-for-delay tactics in which the branded manufacturer pays competitors not to bring a generic to market.72 Although these agreements are illegal and violate antitrust laws, manufacturers nevertheless engage in these tactics, costing consumers an estimated $3.5 billion per year.73 The costs associated with development help explain high prescription drug prices, whereas the different pricing methods explain the discrepancy in spending among government programs.

B.     The Role of Government Insurance Programs

Although many factors contribute to high drug prices, the contracting method employed by large-scale drug purchasers has a large impact on costs to the government and consumers.74 Whereas some federal insurance programs, such as the VA and Medicaid, can achieve deep discounts from manufacturers, Part D continues to see higher prices for the same drugs.75 All three programs receive federal funding and operate within federal regulations; however, the administration of the programs differs due to varying statutory requirements.

The VA is a fully integrated health plan with broad authority to determine drugs listed — and left off of — their formularies and negotiate prices on the national Federal Supply Schedule.76 On the one hand, Medicaid, which provides health insurance to certain low-income individuals, is paid for with joint state and federal dollars and administered by the state using a statutory rebate mechanism to determine pharmaceutical pricing.77 On the other hand, Part D offers prescription drug plans (PDPs) to seniors aged sixty-five and older through private insurance companies operating within limited federal parameters.78 Part D and the VA are characterized appropriately as insurance programs, whereas Medicaid might better be thought of as an assistance program, charging enrollees less in premiums. Although both Part D and the VA are insurance programs, the VA yields an average of forty-percent savings on prescription drugs for beneficiaries in the program as compared with Part D.79 In addition, Medicaid can achieve rebates similar to those that private insurance companies can achieve.80 The differences in price outcomes reflect decisions made by lawmakers to create different program structures and price-control mechanisms.81

1.   The Veterans Health Administration

The VA provides health insurance and direct health care to veterans and their families in VA hospitals and clinics.82 The VA uses four contracting mechanisms to purchase pharmaceuticals: (1) federal price ceilings, (2) the Federal Supply Schedule (FSS), (3) blanket purchase agreements (BPAs), and (4) national standardized contracts.83 Depending on the drug, the VA  uses  the contracting method that provides the lowest price.84 Under the Veterans Health Care Act of 1992,85 manufacturers must list their drugs on the FSS and report the average manufacturing price (AMP) to determine the federal price ceiling.86 In determining the federal price ceiling, the VA receives at least a twenty-four percent discount on the AMP.87 Various federal agencies, including the Department of Defense, VA, Coast Guard, and Public Health Service, use the federal price ceiling, which sets a price cap.88 As a condition of participating in the Medicaid program, manufacturers must place their drugs on the FSS.89 The VA National Acquisitions Center sets the price on the FSS, which is equal to the price paid by the manufacturer’s most favored customer, or the customer who receives the lowest price.90 The VA can negotiate BPAs with manufacturers, which provide additional savings of five to fifteen percent off the FSS price.91 Finally, the most effective price-control mechanism used by the VA is the national standardized contract.92 The VA uses a restrictive formulary and can achieve additional savings of ten to sixty percent off the FSS through competitive bidding between drugs in the same class.93  While the VA has several contracting tools available to it to achieve the best price and largest discount, Medicaid uses a different system.

2.   Medicaid

Medicaid is a health care assistance program for low-income individuals. Depending on the state of residence, Medicaid provides health care to low-income children, pregnant women, the elderly, and people with disabilities who meet certain income requirements.94 The federal government assumes much of the responsibility for Medicaid program costs, with the states administering and funding the rest.95 Medicaid operates through pharmacy benefit managers (PBMs), who dispense prescriptions directly to Medicaid recipients; Medicaid reimburses pharmacies for filling the prescriptions, plus a dispensing fee.96 Congress mandated statutory rebates of 23.1% and additional rebates if the drug price rises faster than inflation.97

States do not have broad discretion to set price controls under Medicaid; however, the Omnibus Reconciliation Act of 199098 gave states authority to implement an additional rebate system and set their own reimbursement formulas.99 Federal law sets the maximum price at or below the lowest price others are paying,100 and  states  negotiate  separately  with  manufacturers  for additional discounts in exchange for placement on the preferred list.101 Although not required by federal law, these additional rebates help states achieve greater savings.102

III.  Medicare Part D

A.     History and Background of Part D Implementation

As health care costs rose in the early 1990s, many private insurance plans dropped prescription drug coverage.103 Congress passed the Medicare Prescription Drug Improvement and Modernization Act of 2003 (MMA),104 which created an optional prescription drug plan for Medicare beneficiaries, known as Medicare Part D.105 Now, under Part D, ninety percent of Medicare beneficiaries, or forty-one million Americans, have prescription drug coverage.106 However, despite having insurance, many seniors still cannot afford the prescriptions that they need.107

The Centers for Medicare and Medicaid Services (CMS) contracts with private insurance plans, or plan sponsors, to establish and run plans, pro- vided they meet certain minimum requirements.108 Operating under broad  guidelines from CMS, plan sponsors may negotiate prices with pharmaceutical manufacturers and determine formularies and cost-sharing agreements directly with beneficiaries.109 Although CMS provides guidelines, plan sponsors have flexibility and discretion in shaping their PDPs, such as by determining formularies or setting cost-sharing agreements.110 Private insurance companies bear some financial risk, but Medicare covers much of the operating costs through subsidies and reinsurance.111

The MMA includes a provision known as the noninterference clause, which explicitly prohibits CMS from intervening in negotiations between plan sponsors and pharmaceutical companies.112 Wanting to promote competition in  the marketplace, Congress left negotiating prices and formularies solely to the plan sponsors, stating that “[i]n order to promote competition . . . 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.”113 In 2018, there are 782 PDPs,114 all of which separately negotiate with manufacturers for discounts. Despite Part D accounting for more than a quarter of the U.S. prescription drug market115 and the government covering a significant portion of the Part D costs, the federal government cannot directly influence the price paid for the federally subsidized insurance program.116 And studies show that other government programs can obtain larger discounts and savings than Medicare.117

B.  Centers for Medicare and Medicaid Services Competitive Bidding with Plan Sponsors

Part D is a competitive program that uses two elements of competition to keep prices down.118 First, plan sponsors compete among themselves to offer better plan coverage and lower premiums to beneficiaries.119 Second, by using competition between drug manufacturers to lower costs through preferential formula placement, sponsors can achieve discounts from manufacturers, which they may pass on to beneficiaries in the form of lower premiums.120 In addition, sponsors can control costs by encouraging the use of generics and less expensive branded drugs or by negotiating directly with manufacturers for discounts.121

CMS opens the competitive bidding process by issuing a “call letter” to solicit bids from plan sponsors intending to offer PDPs.122 Prospective sponsors submit bids in June, including information on the coverage policy and the monthly cost for an average beneficiary.123 After bids are submitted, the monthly costs are averaged to obtain the national average benchmark.124 Beneficiaries pay a universal monthly premium, plus or minus the difference between their plan and the average.125 If a plan is approved, CMS contracts with the plan sponsor to enroll beneficiaries for that year.126

Part D plans must meet a minimum package of benefits set forth by CMS or offer an equivalent alternative or enhanced plan.127 A drug must be listed on the plan formulary128 and covered to be eligible for Part D.129 Insurance companies may alter plans at the beginning of an enrollment period by changing the list of formulary drugs or altering cost-sharing agreements.130

Plan sponsors list covered drugs on formularies and must provide at least two drugs in each class of drugs used to treat a condition, plus every drug in six specified classes.131  Plan sponsors have the authority to separate formularies into tiers, with more expensive drugs requiring higher cost-sharing between the beneficiary and plan.132 For example, to encourage the use of cheaper drugs, a plan might cover a larger portion of the cost of a cheap generic drug by electing to put it on a tier with lower out-of-pocket costs.133  Plans may  put the discounted drug on a lower cost-sharing tier to encourage its use and discourage the use of more expensive drugs.134 Plan sponsors often can obtain discounted prices by placing a particular drug on a preferred tier with lower cost-sharing.135 By driving beneficiaries toward particular drugs because of cost savings to the beneficiary, a plan sponsor can negotiate lower prices with the manufacturers.136

Some researchers have argued that plan sponsors can obtain significant discounts where Part D is a large portion of the market share.137 The ability of PDPs to drive beneficiaries toward particular drugs gives plan sponsors leverage to drive down their own prices.138 Even though plan sponsors negotiate directly with manufacturers, they achieve rebates that are less than Medicaid’s statutory rebates.139

C.      Cost-Sharing: Federal Subsidies and Reinsurance

Federal payments to plan sponsors appear in many forms and cover a substantial portion of total costs. First, the government pays direct subsidies to plan sponsors to cover part of the premium costs.140 Through reinsurance (i.e., insurance for insurance companies), the government must pay eighty percent of the costs that exceed the limit of $5,000 per beneficiary.141 Plan sponsors are responsible only for roughly fifteen percent of the cost.142 Between 2007 and 2017, the government’s outlays on reinsurance increased from roughly twenty-five percent to over fifty-six percent per beneficiary.143 The Medicare Payment Advisory Commission found, however, that the sharp increase in government spending was due not to an increase in the number of beneficiaries hitting reinsurance levels but to increases in drug prices.144

Second, the government pays additional subsidies for low-income beneficiaries.145 There are some ways that the government seeks to control costs here. For example, “risk adjustment” involves adjusting payments to plan sponsors for beneficiaries with more expensive medical conditions.146 By compensating sponsors of plans with riskier pools, the government uses risk adjustment to discourage plan sponsors from creating plans that attract only those that they believe are healthy and cheaper to cover.147

VI.  Contracting Solutions to Reduce Cost

Prescription drug spending accounts for one-sixth of total Medicare spending.148 As drug prices continue to rise and the strains on the federal budget increase, the government should look at effective contracting solutions to lower costs. Any solution must place a careful balance on lowering costs for the government without stifling innovation by too drastically decreasing the return on investment of developing new drugs. If pharmaceutical manufacturers experience a steep decline in profits benefiting the government, they may be wary to invest in innovative drugs that offer better treatment  and may focus instead on managing chronic conditions.149 Failure to continue innovating could have long-term consequences on our health care system  and ultimately harm patients who may need a more effective and efficient treatment or have illnesses that are currently untreatable. High profits, while hurting consumers, allow insurance companies to continue innovating and pursue riskier projects.

First and foremost, Congress should repeal the noninterference clause, which has prohibited CMS from directly interfering in negotiations between plan sponsors and pharmaceutical manufacturers. This is a necessary first step to achieve any cost savings in the Part D program, although this alone would not obtain satisfactory cost savings.150 By applying the contracting mechanisms already used by other federal health programs, the government could obtain significant cost savings. The government could require Part D drugs to be purchased off the FSS or empower CMS to create and manage a formulary for the Part D program. Alternatively, Congress could set a national price ceiling similar to the VA’s most favored customer (MFC) price. Finally, Congress could enact similar statutory rebates to those of Medicaid, which provide mandatory rebates higher than plan sponsors typically can achieve.

A.     Repealing the Noninterference Clause

The federal government covers a significant portion of the Part D cost and should be able to control its own spending directly by employing contracting tools and methods used by other agencies to control costs. The noninterference clause prohibits the government and the biggest government purchaser, Medicare, from receiving volume discounts.151 To leverage the federal government’s purchasing power effectively, Congress should repeal the noninterference clause. Plan sponsors use formulary inclusion and tier placement as their primary leverage in negotiating with pharmaceutical companies.152 Since Congress requires that plan sponsors negotiate separately, fracturing the Part D population into subgroups, they effectively have tied their own hands.153 CMS ultimately could drive down prescription drug costs by leveraging the federal government’s buying power and its forty-one million Medicare beneficiaries.

PDPs only share in fifteen percent of the overall catastrophic liability and have no significant financial incentive to keep costs down, other than offering competitive plans to beneficiaries.154 This limited risk deters plan sponsors from capping spending or coverage because they know the government will pick up the tab. Similarly, plan sponsors have an incentive to underestimate their costs, which keeps premiums low and enrollment up.155 Critics argue that giving the government the authority to negotiate drug prices would eliminate plan sponsors’ ability to compete;156 because plan sponsors can negotiate independently and compete with other plan sponsors by providing better coverage at a lower price to beneficiaries, the current system has proven to be effective and efficient.157

Congress has considered repealing the noninterference clause before. The Medicare Drug Price Negotiation Act of 2017158 would repeal the noninterference clause and give the Secretary of Health and Human Services the authority to engage directly in negotiations with pharmaceutical manufacturers.159 Merely repealing the noninterference clause would have a negligible effect on overall Medicare spending;160 however, there are several contracting methods CMS could employ to directly control spending. For example, the Medicare Drug Price Negotiation Act would direct the Secretary to develop formularies aimed at leveraging the purchasing power of the Part D program.161 In addition, this bill would restore low-income rebates that existed prior to passage of the MMA, similar to the rebates that the Medicaid program requires.162

To drive down prices of orphan or newly branded drugs, the government would need to implement cost-control mechanisms. Though a necessary first step toward controlling costs, merely giving the government the ability to negotiate will not lower costs, especially when negotiating over drugs that lack a sufficient substitute in the market.163 In 2015, the FDA approved more new drugs than usual.164 The increase in newly available drugs has impacted overall spending165 because, when it comes to drugs without substitutes, it is difficult to demand lower prices without the leverage of giving the business to a competitor.166 Statutory tools to leverage the Part D program or provide statutory price reductions thus will be necessary for CMS to negotiate effectively to adequately relieve costs.

Federal statutes provide the VA and Medicaid with tools to reduce the cost of prescription drugs, but Congress took a drastically different approach in establishing the Part D program. The government oversees several federally funded and administered health care programs. By examining the drug pricing models that the VA and Medicaid use, it is possible to identify potential solutions for Part D.

B.  Three Contracting Solutions to Reduce Part D Prescription Drug Spending

The Part D program spends significantly more on prescription drugs than other government health programs, which have been able to achieve discounts using statutory contracting tools provided by Congress. If Congress provided CMS with contracting tools, CMS would be able to increase opportunities   to achieve cost savings. First, Congress could grant CMS the same authority as the VA to use the FSS or create their own restrictive formularies. Second, Congress could give CMS authority to impose price ceilings like the MFC price used by the VA. Finally, Congress could grant CMS the authority to require drug companies to offer rebates to Part D plan sponsors and allow for additional negotiated rebates, as with Medicaid.

1.   Applying the VA Restrictive Formulary Model

One option to reduce government costs is to have Part D mirror the VA model by purchasing drugs directly from the FSS, using the pre-negotiated cost savings, or giving CMS the authority to create its own restrictive formularies.167 The VA negotiates the prices for the FSS, which any direct government purchaser can access.168 The prices listed on the FSS are typically the lowest prices charged to a non-federal purchaser.169 Substituting the FSS price for Part D could save $21.9 billion, or $483 per beneficiary, annually.170 

Using the national standardized contracts method, the VA is able to control its own formularies and negotiate additional savings from the FSS by excluding certain drugs after a competitive bidding process.171 Research shows the VA receives a forty-percent savings on popular prescription drugs by negotiating directly with pharmaceutical manufacturers.172 The VA is able to achieve additional savings by using a competitive bidding process between manufacturers in a similar treatment class because pharmaceutical companies have an incentive to offer large discounts on their drugs to win the contract.173 Restrictions on the number of drugs on the formularies can decrease access to potentially better and more efficient treatment. Of the top 200 drugs, the VA national formulary contains only fifty-nine percent, whereas Medicare PDPs cover eighty-five percent.174 That is because PDPs must cover at least two brands  in a treatment class, and all in six classes.175 The least generous PDP covered sixty-eight percent, still nearly ten percent more than the VA.176 But the VA’s ability to exclude most drugs increases the competition for securing a spot on the formulary and thus improves savings. If CMS had the authority to implement a Medicare formulary, the Medicare program could see significant cost savings.177 However, formulary restrictions also may decrease patient access and choice, as they would deny coverage of certain drugs to beneficiaries.178

A major challenge of applying the VA model to Medicare is the structural and practical differences of the programs. The VA operates as a fully integrated system, meaning the VA negotiates prices directly with and purchases directly from manufacturers.179 The VA has its own pharmacies through which they distribute prescriptions in person and via consolidated mail outpatient pharmacy networks.180 In contrast, physicians, hospitals, pharmacies, and other providers serving Medicare are not affiliated with the Medicare program.181 Additionally, since the FSS is used by direct purchasers, the price does not account for dispensing fees.182 Plan sponsors often work through middlemen known as pharmacy benefit managers (PBMs) to manage the plans and contract with preferred pharmacies to dispense prescriptions directly to consumers.183 Since the FSS and formularies do not contemplate such costs, the savings for Medicare would not be as great and, as a practical matter, would be difficult to administer.184

If Part D hopes to see similar savings as the VA, the program would require significant structural and statutory changes. These changes would profoundly alter the nature of the Part D program, which encourages beneficiaries to compare plans and find the formularies that match their needs.185 By using this method, plan sponsors could no longer achieve additional savings with manufacturers, depriving them of a competitive advantage they currently use to achieve savings and lower premiums, which attracts enrollees. In addition, redesigning Part D to fit the VA mold might require the government set up  its own pharmacies to dispense prescriptions. Private pharmacies would lose significant business to a federal pharmacy system.

Although the Part D system is less generous to beneficiaries and more expensive to the government,186 setting up a restrictive Medicare formulary would likely have a significant negative impact on beneficiaries. Many drugs that are potentially more effective might be removed from the covered list, reducing patient access. This outcome could prove politically unpopular, as reducing patient access to certain drugs would likely have a negative impact on patient care.

2.   Establishing a National Price Ceiling

A second option for lowering the overall government outlays in purchasing prescription drugs is for CMS to set up a price control like the MFC requirement used by the VA. In addition to a restrictive formulary, the VA has other statutory and administrative methods of driving down pharmaceutical costs.187 The Veterans Health Care Act of 1992188 effectively set a price ceiling for manufacturers selling pharmaceuticals to the VA and other direct government purchasers.189 By law, the VA must receive a price that is no greater than the price the manufacturer charges the MFC,190 and prices cannot increase faster than inflation.191

If Congress authorized a similar model for Medicare, the Secretary of Health and Human Services could require pharmaceutical manufacturers to sell at a price below a specified cap to contract with plan sponsors and pro- vide drugs for the Part D program or receive Medicaid rebates. Plan sponsors would be free to negotiate down from the ceiling. But setting a national price ceiling would only guarantee prices at or below the ceiling and would not necessarily ensure that PDPs would continue to achieve significant discounts.192 Nonetheless, this option would maintain competition within the program because plan sponsors would still be free to negotiate for themselves.

Canada has succeeded in controlling the costs of patented drugs by setting a maximum price for new drugs, which have a high market entry price because there is no generic alternative.193 Canada determines the maximum price by comparing rates in other developed countries, through the independent Patented Medicines Prices Review Board (PMPRB).194 The PMPRB found that patented drugs cost 2.7 times more in the United States than in Canada.195 But Canada has had less success in controlling the price of generics due to limited generic competition and a smaller population.196 In addition, Canada only uses the listed prices in other countries and does not consider the additional rebates and discounts those countries can achieve.197 By using the pre-rebate price instead of actual price, Canada may pay more for branded drugs.

Some argue that using price controls increases prices for some consumers, curtails innovation, and reduces patient access, whereas promoting competition lowers costs and increases access.198 In Canada, the pharmaceutical manufacturer trade association expressed concerns that price controls will limit access to new medicines.199 Critics worry that price controls, while producing short term savings, will stifle innovation and limit the development of breakthrough medicines, which typically charge a premium upon entry.200 Some breakthrough drugs have not gone to market in Canada because of the price restrictions imposed by the Canadian government, limiting patient access to potentially revolutionary drugs.201 However, Canada has succeeded in stabilizing prices below the median in other, similar countries by preventing companies from raising the price of drugs.202 Particularly as U.S. consumers recently saw the price of EpiPen inexplicably increase by 400%, a price ceiling on off-patent drugs that have been on the market for decades might prove  popular among consumers.

3.   Applying the Medicaid Rebate Model

The third option is to require that drug companies provide statutory rebates to plan sponsors, similar to the statutory Medicaid rebates.203 Drug manufacturers voluntarily participate in Medicaid and, under federal law, must refund a portion of the cost back to the states as rebates, which helps state governments obtain lower costs.204 The Medicaid program has achieved prices lower than Part D mainly because Medicaid statutory rebates are larger than the rebates individual plan sponsors can negotiate.205 Medicaid rebates are equal to 23.1% of the average manufacturer price (AMP), or the lowest price they charge another insurance company.206 In addition, if the AMP rises faster than inflation, Medicaid receives a supplementary rebate to offset the increase in cost.207 A Congressional Budget Office study found that these inflation-based rebates were the main reason that Medicaid rebates were higher than Part D savings.208 The average total rebate Medicaid can achieve is sixty-one percent of retail price, compared with the thirty-one percent rebate Part D plan sponsors can negotiate.209

Applying statutory rebates to Part D would achieve significant and immediate cost savings.210 The Congressional Budget Office estimates that the federal government could save $145 billion over ten years by requiring manufacturers to provide low-income Part D enrollees with a rebate of 23.1% of AMP.211 But any policymaker considering this issue should also recognize that more than half of the Medicaid rebates received from manufacturers were inflation-based rebates.212 This indicates that a rebate on AMP alone would not achieve the significant cost savings needed. Moreover, a statutory rebate could backfire by causing pharmaceutical companies to increase the retail list price.213 If the list price is higher, the statutory rebates might not be as effective. The federal government already requires that many drugs be sold under price controls, which shifts costs elsewhere.214 Some worry that further controls, such as requiring Medicare rebates, will amplify the cost-shifting problem further.215

There are many additional challenges to applying a rebate program to Part D, as the infrastructure and authority to impose such a requirement   does not exist. Many worry that applying a Medicaid rebate model to Part D will decrease patient access and quality of care, similar to the effects that the restrictive formulary has on VA beneficiaries.216 Studies show that limits on prescription drugs are related to increased nursing home admissions, which indicates declining health and independence among the elderly.217

Finally, the Medicaid rebate system is not foolproof. Between 2009 and 2016, the Department of Justice recovered over $19 billion in health care fraud.218   In 2011, eight pharmaceutical companies paid out $900 million in    a settlement alleging that the companies set artificially higher prices, causing Medicaid to pay out higher rates than private insurance companies.219 Similarly, Mylan recently settled a $465 million False Claims Act lawsuit in which Mylan was accused of misclassifying the EpiPen as a generic to avoid paying Medicaid rebates.220 Medicare likely would face many of these same challenges that plague the Medicaid program. Overall, despite the potential for waste, fraud, and abuse, congressional authorization of a similar statutory rebate could save the government a significant amount of money, without the implementation challenges of the FSS.

C.  Negative Consequences: The Price We Pay for Savings

The challenges associated with uprooting the Medicare Part D program are similar regardless of the solution adopted. Critics argue that pricing controls have more negative consequences and discourage marketplace competition.221 Although all the scenarios described above likely would result in some government savings, the cost to the public would be significant. A major concern of lowering costs for one group is that the loss in revenue experienced by the pharmaceutical industry inevitably will be made up elsewhere. The Government Accountability Office predicts that a likely effect of applying more cost-effective models to Medicare is an increase in prices among private and other federal health programs.222

In addition, lower revenues could lead to decreased investment in research and development, as companies would not earn profits large enough to off- set the high cost of research and development.223 This could harm patients because slower innovation will delay access to new and potentially more effective drugs.224 Others argue that large profits in the United States do not correlate to high investment in research and development.225 If new drugs  have lower entry prices, the incentive to rush generics to market could be weaker, as the need for cheaper alternatives would not be as pronounced.226 Finally, changing the structure of the Part D program could reduce competition between plans. However, in Switzerland and the Netherlands, which use a similar managed-competition method and whose governments actively negotiate for lower prescription drug prices, competition has not suffered.227 There are serious arguments on both sides of this issue, leading to intense debates as to the future of prescription drug pricing in the United States. Finding the right balance between lowering spending, maintaining access, and encouraging innovation is imperative for any politically feasible solution.

V.  Conclusion

Drug pricing in the United States has reached unacceptable levels, with Part D expenditures increasing and consumers facing unimaginable decisions in determining how to pay for their health care. Any solution must carefully balance cost, innovation, and patient access. Without structural changes to the Part D program, Medicare will not achieve prices lower than the VA, Medicaid, or programs in other developed countries. Although the government-administered health insurance programs are statutorily and structurally different, the VA and Medicaid can obtain prices at least on par with the private sector.228 Considering long-term financing concerns due to increasing expenditures,229 Part D needs structural changes that can achieve significant cost savings.

Ultimately, all three solutions discussed have potential shortcomings, including limiting patient access, stifling innovation, artificially increasing entry prices, and shifting the cost from the government onto private insurance plans or other programs. As the debate continues over best practices to rein in spending on entitlement programs, policymakers must remain vigilant in recognizing the serious unintended consequences of changing the Part D program and must strike a careful balance on costs, access, and innovation.

Entity:
Topic:
  1. See Liz Szabo, As Drug Costs Soar, People Delay or Skip Cancer Treatments, NPR (Mar. 15, 2017), https://www.npr.org/sections/health-shots/2017/03/15/520110742/as-drug-costs-soar-people-delay-or-skip-cancer-treatments.
  2. Id.
  3. Id.
  4. See id.
  5. Id.
  6. See Linda A. Johnson, Here Are the 6 Reasons Why Prescription Drugs Are So Expensive, Bus. Insider (Sept. 25, 2015), http://www.businessinsider.com/ap-multiple-factors-cause-high-prescription-drug-prices-in-us-2015-9.
  7. See Aaron S. Kesselheim et al., The High Cost of Prescription Drugs in the United States: Origins and Prospects for Reform, 316 JAMA 858, 860 (2016).
  8. See Dep’t of Commerce, Int’l Trade Admin., 2016 Top Markets Report Pharmaceuticals 3–4 (2016).
  9. See Aine Quinn, Why Drugs Cost Less in the U.K. Than in the U.S., Bloomberg Businessweek (Sept. 4, 2017), https://www.bloomberg.com/news/articles/2017-09-04/why-drugs-cost-less-in-the-u-k-than-in-the-u-s-quicktake-q-a.
  10. See Ctrs. for Medicare & Medicaid Servs., National Health Expenditures Highlights (2016), https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/downloads/highlights.pdf.
  11. Id.
  12. See Dep’t of Commerce, supra note 8, at 3.
  13. See Altarum Inst., Health Sector Economic Indicators (2017), https://altarum.org/sites/default/files/uploaded-related-files/CSHS-Spending-Brief_February_2017.pdf.
  14. See Kesselheim, supra note 7, at 859.
  15. Medicare Payment Advisory Comm., Report to Congress: Medicare Payment Policy 384 (2017). This figure represents an annual growth rate of seven percent.
  16. Jo Ann Jenkins, Let’s Cut Drug Costs, AARP Bulletin 1, 7 (May 2017), https://www.aarp.org/content/dam/aarp/health/healthy-living/2017/04/drug-prices-download-final.pdf.
  17. See A. Gordon Smith, The Cost of Drugs for Rare Diseases Is Threatening the U.S. Health Care System, Harvard Bus. Rev. (Apr. 7, 2017), https://hbr.org/2017/04/the-cost-of-drugs-for-rare-diseases-is-threatening-the-u-s-health-care-system.
  18. See Press Release, Gilead, U.S. Food and Drug Administration Approves Gilead’s Sovaldi™ (Sofosbuvir) for the Treatment of Chronic Hepatitis C (Dec. 6, 2013) (on file with author).
  19. S. Rep. No. 114-20, 2 (2015).
  20. Id. at 17.
  21. See Editors of AARP, Why Drugs Cost So Much, AARP Bulletin 1 (May 2017), https://www.aarp.org/content/dam/aarp/health/healthy-living/2017/04/drug-prices-download-final.pdf.
  22. Id.
  23. Id.
  24. See Michael A. Carrier & Carl J. Minniti III, The Untold EpiPen Story: How Mylan Hiked Prices by Blocking Rivals, 102 Cornell L. Rev. Online 53 (2017) http://cornelllawreview.org/clronline/the-untold-epipen-story-how-mylan-hiked-prices-by-blocking-rivals.
  25. Id.
  26. S. Rep. No. 114-20, 31 (2015).
  27. Letter from the Ctr. for Medicare Advocacy to Senators Ron Wyden and Charles Grassley (Mar. 4, 2016) (on file with U.S. Senate Finance Committee).
  28. See Cong. Budget Office, Pub. No. 4369, Competition and the Cost of Medicare’s Prescription Drug Program 1, 15 (2014).
  29. See Sarah Karlin-Smith, Trump Says Drug Industry ‘Getting Away with Murder,’ Politico (Jan. 11, 2017), http://www.politico.com/story/2017/01/trump-press-conference-drug-industry-233475; Edward-Isaac Dovere, Trump Backs Medicare Negotiating Drug Prices, Politico (Jan. 25, 2016), https://www.politico.com/story/2016/01/trump-backs-medicare-negotiating-drug-prices-218215.
  30. See Ashley Kirzinger, Bryan Wu & Mollyann Brodie, HealthTracking Poll, Kaiser Family Found. (Sept. 2016), https://www.kff.org/health-costs/report/kaiser-health-tracking-poll-september-2016.
  31. See PhRMA, Biopharmaceutical Research and Development: The Process Behind New Medicines 1 (2015), http://phrma-docs.phrma.org/sites/default/files/pdf/rd_brochure_022307.pdf.
  32. See Henry Grabowski et al., Recent Trends in Brand-Name and Generic Competition, 0135.R1/873723 J. Med. Econ. 1, 4 (2013), available at http://fds.duke.edu/db/attachment/2575.
  33. Id.
  34. See Johnson, supra note 6.
  35. See Gretchen A. Jacobson et al., Cong. Research Serv., RL33802, Pharmaceutical Costs: A Comparison of Department of Veterans Affairs (VA), Medicaid, and Medicare Policies (2007).
  36. See PhRMA, supra note 31.
  37. See id. at 11–14.
  38. See Patents and Exclusivity, FDA/CDER SBIA Chrons. (CDER Small Bus. and Indus. Assistance, Silver Spring, Md.), May 19, 2015, at 1.
  39. See Susan Thaul, Cong. Research Serv., R41983, How FDA Approves Drugs and Regulates Their Effectiveness 4 (2012); Johnson, supra note 6.
  40. See Dep’t of Commerce, supra note 8, at 3. The pharmaceutical industry’s yearly sales total $333 billion.
  41. See Cong. Budget Office, Pub. No. 2589, Research and Development in the Pharmaceutical Industry 2 (2006).
  42. See id. at 19.
  43. Id.
  44. Id. at 4.
  45. See PhRMA, supra note 31. Only one in fifty drugs developed by pharmaceutical companies turns a substantial profit. See Joanna Shephard, The Prescription for Rising Drug Prices: Competition or Price Controls, 27 Health Matrix 315, 338–39 (2017).
  46. See Cong. Budget Office, supra note 41, at 1–5.
  47. See Medicare Payment Advisory Comm., supra note 15, at 385.
  48. See Cong. Budget Office, supra note 41, at 2.
  49. See id. at 24.
  50. See Shephard, supra note 45, at 339.
  51. Id.
  52. 21 U.S.C. § 355 (a) (2012).
  53. See PhRMA, supra note 31, at 10.
  54. See Thaul, supra note 39, at 4–5.
  55. Id. at 5.
  56. Id. at 5–6.
  57. See Cong. Budget Office, supra note 41, at 2.
  58. See Grabowski et al., supra note 32, at 7.
  59. 35 U.S.C. § 154(a)(1) (2012).
  60. See Peter Olson & Louise Sheiner, The Hutchins Center Explains: Prescription Drug Spending, Brookings Inst. (Apr. 26, 2017), https://www.brookings.edu/blog/up-front/2017/04/26/the-hutchins-center-explains-prescription-drug-spending/.
  61. 35 U.S.C. § 154(a)(2) (2012).
  62. Drug Price Competition and Patent Term Restoration Act of 1984 (Hatch-Waxman Act), Pub. L. No. 98-417, 98 Stat. 1585 (1984). Prior to the Hatch-Waxman Act, drug companies filed a New Drug Application with the FDA to bring a generic drug to market.
  63. See Luke M. Olson & Brett W. Wendling, The Effect of Generic Drug Competition on Generic Drug Prices During the Hatch-Waxman 180-Day Exclusivity Period 6 (Fed. Trade Comm’n, Working Paper No. 317, 2013).
  64. 21 U.S.C. § 355(j) (2012).
  65. See Cong. Budget Office, supra note 41, at 16.
  66. See Olson & Wendling, supra note 63.
  67. See Johnson, supra note 6.
  68. See Cong. Budget Office, supra note 41, at 16.
  69. Id.
  70. 21 U.S.C. § 355(j)(5)(B)(iv) (2012).
  71. FTC v. Actavis, 570 U.S. 136, 143–44 (2013).
  72. See Fed. Trade Comm’n, Pay-For-Delay: How Drug Company Pay-Offs Cost Consumers Billions 1 (2010), https://www.ftc.gov/sites/default/files/documents/reports/pay-delay-how-drug-company-pay-offs-cost-consumers-billions-federal-trade-commission-staff-study/100112payfordelayrpt.pdf.
  73. Id.
  74. See supra Section II.A.
  75. See U.S. Dep’t of Health & Human Servs., Office of Inspector Gen., OEI-03-13-00650, Medicaid Rebates for Brand-Named Drugs Exceeded Part D Rebates by a Substantial Margin 9 (2015) (finding that statutory requirements in the Medicaid program allows for larger rebates); Cong. Budget Office, Prices for Brand-Name Drugs Under Selected Federal Programs 9 (2005).
  76. See Cong. Budget Office, supra note 75, at 6–7.
  77. See U.S. Dep’t of Health & Human Servs., supra note 75, at 2–3.
  78. See Suzanne M. Kirchoff, Cong. Research Serv., R40611, Medicare Part D Prescription Drug Benefit 1 (2016).
  79. See Austin Frakt et al., Should Medicare Adopt the Veterans Health Administration Formulary? 21 Health Econ. 485, 492 (2012).
  80. See Christina Provost Peters, Nat’l Health Policy Forum, The Basics: The Medicaid Drug Rebate Program (2009), https://www.nhpf.org/library/the-basics/Basics_MedicaidDrugRebate_04-13-09.pdf.
  81. See Kalipso Chalkidou, Eliminating Drug Price Differentials Across Government Programmes in the USA, 6 Health Econ., Pol., & L. 43, 49 (2011).
  82. See Jacobson, supra note 35, at 6.
  83. Id. at 7–9.
  84. Id. at 7.
  85. See Veterans Health Care Act of 1992, Pub. L. 102-585, § 106 Stat. 4943 (1992).
  86. See Jim Hahn, Cong. Research Serv., RL33782, Federal Drug Price Negotiation: Implications for Medicare Part D 4 (2007).
  87. See 38 U.S.C. § 8126(a)(2) (2012).
  88. Id. § 8126(b) (2012).
  89. Id. § 8126(a)(4) (2012).
  90. See Hahn, supra note 86.
  91. Id. at 5.
  92. Id.
  93. Id.
  94. Ctrs. for Medicare & Medicaid Servs., List of Medicaid Eligibility Groups Mandatory Categorically Needy, https://www.medicaid.gov/medicaid-chip-program-information/by-topics/waivers/1115/downloads/list-of-eligibility-groups.pdf.
  95. See Jacobson, supra note 35, at 11.
  96. See Peters, supra note 80.
  97. The Patient Protection and Affordable Care Act increased the basic rebate from 15.1% to 23.1%. See Pub. L. No. 111-148, 42 U.S.C. 18001 § 2501(a)(1)(A)(iii) (2012).
  98. Omnibus Reconciliation Act of 1990, Pub. L. 101-508, § 104 Stat. 1388 (1990).
  99. See 42 U.S.C. § 1396r-8 (2012).
  100. Manufacturers report pricing to CMS quarterly. See 42 C.F.R. § 447.50.
  101. See Cliff Binder, Cong. Research Serv., R43778, Medicaid Prescription Drug Policy and Pricing 2 (2014).
  102. See id.
  103. See Joseph R. Antos, Ensuring Access to Affordable Drug Coverage in Medicare, 27 Health Care Financing Rev. 103, 104 (2005).
  104. Medicare Modernization Act, Pub. L. No. 108-173, 117 Stat. 2066 (2003).
  105. Id.
  106. See Medicare Payment Advisory Comm., supra note 15, at 387.
  107. See Robin A. Cohen & Maria A. Villarroel, U.S. Dep’t of Health & Human Servs., Nat’l Ctr. for Health Statistics, No. 184, Strategies Used by Adults to Reduce Their Prescription Drug Costs: United States, 2013 (2015).
  108. 42 U.S.C. § 1395w-112 (2012).
  109. See Kirchoff, supra note 78, at 2, 37.
  110. See The Medicare Part D Prescription Drug Benefit, Kaiser Family Found. 3 (Oct. 2, 2017), http://kff.org/medicare/fact-sheet/the-medicare-prescription-drug-benefit-fact-sheet.
  111. See id. at 4.
  112. 42 U.S.C. § 1395w-111(i) (2012).
  113. Id.
  114. See Medicare Part D Prescription Drug Benefit, supra note 110.
  115. See Olson & Sheiner, supra note 60.
  116. See 42 U.S.C. § 1395w-111(i) (2012).
  117. See Marc-Andre Gagnon & Sidney Wolfe, Mirror, Mirror on the Wall: Medicare Part D Pays Needlessly High Brand-Name Drug Prices Compared to Other OECD Countries and with U.S. Government Programs, Pub. Citizen 6 (2015), https://www.citizen.org/sites/default/files/2269a.pdf.
  118. See Richard G. Frank & Richard J. Zeckhauser, A Framework for Negotiation in Medicare Part D 3 (Ctr. for Health Policy & Hutchinson Ctr. on Fiscal and Monetary Policy at Brookings, Working Paper No. 28, May 2017), https://www.brookings.edu/wp-content/uploads/2017/05/wp28_frankzeckhauser_medicarepartd.pdf.
  119. Id.
  120. Id.
  121. See Cong. Budget Office, supra note 28, at 25.
  122. See Ctrs. for Medicare & Medicaid Servs., Medicare Prescription Drug Benefit: Solicitation for Applications for Medicare Prescription Drug Plan 2018 Contracts 8 (2017).
  123. Id.
  124. See Medicare Payment Advisory Comm., supra note 15, at 388.
  125. Id.
  126. See Kirchoff, supra note 78, at 37.
  127. 42 U.S.C. § 1395w-102(a) (2012).
  128. See Ctrs. for Medicare & Medicaid Servs., Medicare Prescription Drug Benefit Manual, CMS Pub. 100-18, ch. 6, § 10.2 (rev. 18, Jan. 15, 2016). The formulary is a list of prescription drugs that a particular plan will cover, which are developed by a committee of practicing physicians, pharmacists, and others and approved by CMS.
  129. Id.
  130. See Kirchoff, supra note 78, at 8.
  131. See Ctrs. for Medicare & Medicaid Servs., supra note 128, §§ 30.2.1, 30.2.5.
  132. See Cong. Budget Office, supra note 28, at 27.
  133. Id.
  134. Id.
  135. Id.
  136. See id.
  137. See Mark Duggan & Fiona Scott Morton, The Effect of Medicare Part D on Pharmaceutical Prices and Utilization, 100 Am. Econ. Rev. 590 (2010).
  138. See Cong. Budget Office, supra note 28, at 27.
  139. See Lee H. Rosebush, Practice Resource: Select Issues in Negotiating Drug Pricing and Reimbursement Contracts, 10 J. Health & Life Sci. 59, 71 (2016).
  140. See Cong. Budget Office, supra note 28, at 16.
  141. Id. at 14–15.
  142. Id.
  143. See Frank & Zeckhauser, supra note 118, at 2–3.
  144. See id. (citing Medicare Payment Advisory Comm., supra note 15, at 385).
  145. See Cong. Budget Office, supra note 28, at 17.
  146. Id.
  147. Id.
  148. See 10 Essential Facts About Medicare and Prescription Drug Spending, Kaiser Family Found. (Nov. 10, 2017), https://www.kff.org/infographic/10-essential-facts-about-medicare-and-prescription-drug-spending.
  149. See Cong. Budget Office, supra note 41, at 2.
  150. See Letter from Douglas Holtz-Eakin, Dir., Cong. Budget Office, to Senator Ron Wyden, Ranking Member, Senate Fin. Comm. (Mar. 3, 2004), https://www.cbo.gov/sites/default/files/108th-congress-2003-2004/reports/03-03-wyden.pdf [hereinafter CBO Letter].
  151. See Chalkidou, supra note 81, at 45.
  152. See John B. Kirkwood, Buyer Power and Healthcare Prices, 91 Wash. L. Rev. 253, 264–65 (2016).
  153. See Brook Ames, Paying Less for Celebrex: A Comparative Study of Medicaid Prescription Drug Cost Containment Programs and a Recommendation for Medicare’s Increasing Drug Costs, 85 B.U.L.R. 517, 550–51 (2005).
  154. See Richard Frank, Should Drug Prices Be Negotiated Under Part D of Medicare? And If So, How?, 27 Health Aff. 33, 39 (2008).
  155. See Cong. Budget Office, supra note 28, at 16.
  156. See Acad. of Managed Care Pharmacy, Medicare Part D: Government Negotiation of Prescription Drug Prices (2013), http://amcp.org/WorkArea/DownloadAsset.aspx?id=16631.
  157. See id.
  158. Medicare Drug Price Negotiation Act of 2017 (S. 2011). This bill passed the U.S. House of Representatives in 2007, but later passed the U.S. Senate. Medicare Prescription Drug Price Negotiation Act of 2007, H.R. 4, 110th Cong. (2007). Majority Leader Reid blamed pressure from pharmaceutical and insurance industries for its failure. See Klaus Marre, Senate GOP Blocks Medicare Part D Negotiation Bill, Hill (Apr. 18, 2007), http://thehill.com/homenews/news/11611-senate-gop-blocks-medicare-part-d-negotiation-bill.
  159. Medicare Drug Price Negotiation Act of 2017 (S. 2011) (2017).
  160. See CBO Letter, supra note 150.
  161. Medicare Drug Price Negotiation Act of 2017 (S. 2011).
  162. Id.
  163. See Cong. Budget Office, A Detailed Description of CBO’s Cost Estimate for the Medicare Prescription Drug Benefit 15 (2004).
  164. See U.S. Dep’t Health & Human Servs., Report to Congress, Prescription Drugs: Innovation, Spending, and Patient Access 3 (2016).
  165. See id.
  166. See Frank, supra note 154, at 37.
  167. See Hahn, supra note 86, at 6.
  168. See id. at 4.
  169. See id.
  170. See Walid F. Gellad et al., What If the Federal Government Negotiated Prices for Seniors? An Estimate of National Savings, 23 J. Gen. Intern. Med. 1435, 1438 (2008).
  171. See id.
  172. See Frakt et al., supra note 79.
  173. See Cong. Budget Office, supra note 76, at 9.
  174. See Frakt et al., supra note 79.
  175. See Hahn, supra note 86, at 16–17.
  176. See Frakt et al., supra note 79.
  177. See Kesselheim, surpa note 7, at 866.
  178. See Paula Tironi, Pharmaceutical Pricing: A Review of Proposals to Improve Access and Affordability of Prescription Drugs, 19 Annals Health L. 311, 353 (2010).
  179. See Mike McCaughan, Health Aff., Prescription Drug Pricing #8: Veterans Health Administration 1 (2017).
  180. See Hahn, supra note 86, at 6.
  181. See McCaughan, supra note 179, at 3.
  182. See Gellad, supra note 170, at 1439.
  183. Suzanne M. Kirchoff, Cong. Research Serv., IF-I0037, In Focus: Medicare Preferred Pharmacy Networks 1 (2016).
  184. See Gellad et al., supra note 170, at 1439.
  185. See McCaughan, supra note 179, at 3.
  186. See Chalkidou, supra note 81, at 53.
  187. See McCaughan, supra note 179, at 3.
  188. Veterans’ Health Care Act of 1992, Pub. L. No. 102-585, 106 Stat. 4943 (1992).
  189. 38 U.S.C. § 8126(a)(2) (2012).
  190. Id.
  191. See Jacobson, supra note 35, at 9.
  192. See id. at 14.
  193. See Sean Davidson, Drug Price Regulations Need Overhaul to Protect Consumers, Experts Say, CBC (Sept. 23, 2015), http://www.cbc.ca/news/health/prescription-drug-prices-1.3239317.
  194. See Patented Meds. Prices Review Bd., Compendium of Guidelines, Policies, and Procedures 40 (2003), http://www.pmprb-cepmb.gc.ca/CMFiles/Compendium_Feb_2017_EN.pdf.
  195. See Patented Meds. Rev. Bd., Annual Report 2015, at 28 tbl.11 (2015), http://www.pmprb-cepmb.gc.ca/CMFiles/Publications/Annual%20Reports/2015/2015_Annual_ Report_Final_EN.pdf.
  196. See Joel Lexchin, Pharmaceutical Prices in the 21st Century 25, 35 (2015).
  197. See Davidson,supra note 193.
  198. See Devidas Menon, Pharmaceutical Cost Control in Canada: Does It Work?, 20 Health Aff. 92, 99–100 (2001).
  199. See id.
  200. See Peter J. Pitts, The False Promise of Drug-Price Controls, Nat’l Rev. (May 19, 2017, 8:00 AM), http://www.nationalreview.com/article/447755/drug-price-controls-bad-idea.
  201. See Menon, supra note 198, at 99.
  202. See Talal Rashid, The EpiPen Problem, 26 U. Miami Bus. L. Rev. 129, 153 (2017).
  203. See Jacobson, supra note 35, at 14.
  204. See 42 U.S.C. § 1396r-8 (2012).
  205. See Cong. Budget Office, supra note 28, at 30. For further discussion, see Brendan Murphy, Getting High on Profits: An Analysis of the Current State and Federal Proposals to Rein in Soaring Drug Prices, 12 J. Health & Biomed. L. 37, 78–81 (2016).
  206. See 42 C.F.R. § 447.509(a)(i)(B)(3).
  207. See 42 U.S.C. § 1396r-8(c)(2)(A) (2012).
  208. See Cong. Budget Office, OEI-03-13-00650, Medicaid Rebates for Brand-Name Drugs Exceed Part D Rebates by a Substantial Margin 1 (2015).
  209. See Altarum Inst., The Impact of Prescription Drug Rebates on Health Plans and Consumers 33–34 (2018).
  210. See Murphy, supra note 205, at 79.
  211. See Cong. Budget Office, Pub. No. 52142, Options for Reducing the Deficit: 2017–2026, at 255 (2016).
  212. See id.
  213. See Murphy, supra note 205, at 79.
  214. See Shephard, supra note 50, at 337.
  215. See id.
  216. See Medicare Part D Effective and Stable, Pfizer Global Policy and International Public Affairs (Oct. 2015), https://www.pfizer.com/files/about/Position-Medicare-Part-D.pdf.
  217. See id.
  218. Dep’t of Justice, Fact Sheet: Significant False Claims Act Settlements & Judgements Fiscal Years 2009–2016 (2016), https://www.justice.gov/opa/press-release/file/918366/download.
  219. See id.
  220. Press Release, Dep’t of Justice, Mylan Agrees to Pay $465 Million to Resolve False Claims Act Liability for Underpaying EpiPen Rebates (Aug. 17, 2017), https://www.justice.gov/opa/pr/mylan-agrees-pay-465-million-resolve-false-claims-act-liability-underpaying-epipen-rebates.
  221. See Shephard, supra note 50, at 317.
  222. See U.S. Gov’t Accountability Office, GAO/HEHS-00-118, Expanding Access to Federal Prices Could Cause Other Price Changes, Report to Congressional Requesters 16 (2000).
  223. See Shephard, supra note 50, at 338.
  224. See id.
  225. See Jordan A. Huffman, Cause and Effect: A Comparative Analysis on How Allowing Medicare Pharmaceutical Negotiations Could Impact Research and the Greater Pharmaceutical Industry, 34 Ariz. J. Int’l & Comp. L. 227, 245 (2017).
  226. See Shephard, supra note 50, at 338.
  227. See Murphy, supra note 205, at 80.
  228. See Cong. Budget Office, supra note 76, at 12.
  229. See Bds. of Trs. of the Fed. Hosp. Ins. & Fed. Supplementary Med. Ins. Tr. Funds, 2017 Annual Report, 18 (2017). Medicare spending accounted for 3.6% of GDP in 2016. Without substantial changes to current law, spending is expected to “increase to 5.6% of GDP by 2041 and 9.0% of GDP by 2091,” due to the growing beneficiary population and because Part D is exempted from statutory price reductions. Id.