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![handle is hein.crs/govegoy0001 and id is 1 raw text is: Congressional Research Servtte
Informing the legislative debate since 1914
Updated May 23, 2022
Negotiation of Drug Prices in Medicare Part D
The 117th Congress is considering a number of approaches
to address prescription drug prices and spending, including
proposals to allow the Secretary of Health and Human
Services (HHS) to negotiate prices in the Medicare Part D
program. This In Focus provides an overview of how drug
prices are established under Part D and describes various
proposals for HHS secretarial negotiation.
Overview of Med kare Part D
Congress created the voluntary Medicare outpatient
prescription drug benefit, Part D, in the Medicare
Prescription Drug, Improvement, and Modernization Act of
2003 (MMA; P.L. 108-173). The program began operation
in 2006, and about 50 million Medicare beneficiaries are
now enrolled. In 2022, Part D spending is estimated to be
approximately $120 billion. (See CRS Report R40425,
Medicare Primer, and CRS Report R40611, Medicare Part
D Prescription Drug Benefit.)
Part D coverage is provided by private health payers (plan
sponsors) that offer drug-only plans (PDPs) or Medicare
Part C (Medicare Advantage) plans with a Part D benefit
(MA-PDs). Congress designed Part D as a market-oriented
program where sponsors compete for enrollees based on
benefit scope and price, such as premiums and cost sharing.
Figure I. 2022 Medicare Part D Standard Benefit
pays _
BrandN D[ R
Gene rugs
End le pay IOO
Source: CRS analysis of the Centers for Medicare and Medicaid
Studies (CMS), 2022 Part D Payment Policies.
Note: Enrollees also pay monthly premiums. In the standard benefit,
an enrollee pays 100% of costs in a deductible, then has average 25%
cost sharing until accumulating enough out-of-pocket spending to
reach the catastrophic threshold, where cost sharing is capped at 5%.
Medicare/plan subsidies vary in different benefit stages, as seen in the
right portion of the graphic. Manufacturers provide a 70% discount
on brand drugs in the doughnut hole. In 2022, enrollees enter the
doughnut hole with $4,430 in total drug spending.
Sponsors submit annual bids to HHS to offer drug plans. At
a minimum, Part D plans must offer a standard benefit
defined in law or alternative coverage that is at least
actuarially equivalent to a standard benefit. (See Figure 1.)
Medicare pays plan sponsors a monthly per person amount
for standard coverage, as well as monthly payments for
low-income enrollees and cost-based reinsurance
payments for enrollees with the highest drug spending.
Determination of Drug Prices in Medicare Part D
To bolster market competition and limit the federal role, the
MMA includes a noninterference provision (Social Security
Act [SSA] §1860D-11(i)), which states that in carrying out
the Part D program, 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.
Although there is no Part D centralformulary (i.e., list of
covered drugs), plans must cover at least two drugs in each
category or class used to treat the same medical condition
and substantially all drugs in six protected classes: immune-
suppressant, antidepressant, antipsychotic, anticonvulsant,
antiretroviral, and antineoplastic (cancer). HHS has existing
authority to modify these general formulary requirements,
including the six protected classes. Most Part D sponsors
offer alternative plans that include tiered formularies, which
impose different levels of co-payments (flat dollar amount)
or coinsurance (percentage of drug price) for generic,
brand-name, and specialty drugs. Part D specialty drugs are
defined as those with a price of at least $830 per month in
2022. Specialty drugs (which can be defined in different
ways depending on the payer), a relatively small share of
total prescriptions in Part D and private plans, accounted for
more than 50% of U.S. retail drug spending in 2020, up
from 27% in 2010, according to industry estimates.
Part D sponsors, working with pharmacy benefit managers
(PBMs), negotiate prices with drug manufacturers and
contract with pharmacies to dispense drugs to plan
enrollees. Negotiated price concessions mainly take the
form of rebates (after-sale reductions) from a
manufacturer's list price for brand-name drugs. Plan
sponsors and PBMs can secure rebates by including a drug
on a plan formulary and, further, by putting the drug on a
low cost-sharing tier. Sponsors and PBMs have the most
leverage to negotiate rebates when there are competing
drugs on the market; they have less ability to secure rebates
for sole-source drugs or those in the protected classes. A
rebate's value may be tied to the drug's sales volume or
market share and may be aggregated and paid to a plan over
time, such as quarterly. Part D plan sponsors may pass on
rebates and other price concessions to enrollees in the form
of lower drug prices at the pharmacy, but the vast majority
do not, according to CMS. Instead, sponsors use rebate
revenue to buy down, or reduce, premiums, thus spreading
price concessions across all enrollees.](ViewImageLocal?handle=hein.crs/govegoy0001&div=1&collection=&method=preview&ext=.png&size=3)