United States Government Accountability Office

GAO Testimony 

Before the Committee on Oversight and 

Government Reform, House of 

Representatives

PRESCRIPTION DRUGS

Oversight of Drug Pricing in 

Federal Programs 

Statement of John E. Dicken 

Director, Health Care 

For Release on Delivery

Expected at 10:00 a.m. EST 

Friday, February 9, 2007

 

GAO-07-481T 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

February 9, 2007

PRESCRIPTION DRUGS 

Oversight of Drug Pricing in Federal 

Highlights of GAO-07-481T, a testimony Programs 

before the Committee on Oversight and 

Government Reform, House of 

Representatives 

Several federal programs help pay 

for or reduce the costs of

prescription drugs for eligible

individuals and entities. Three 

examples are the Medicaid drug

rebate program, part of the joint

federal-state Medicaid program 

that finances medical services for 

certain low-income people; the 

340B drug pricing program, which 

provides discounted drug prices to

certain eligible entities such as

community health centers; and the

Medicare Part D program, which

provides a Medicare drug benefit 

for the elderly and certain disabled

people. The price information drug

manufacturers report under these

federal programs affects related

federal spending. Spending is also 

affected by the extent to which 

federal oversight ensures the 

accuracy of this information. 

GAO was asked to provide

information related to the oversight 

of prescription drug pricing 

practices that affect these federal 

programs. This testimony focuses 

on the oversight of drug pricing

related to the three programs and 

the implications for future

congressional oversight. This

testimony is based on recent GAO

reports examining these programs 

and related work by the

Department of Health and Human

Services Office of Inspector 

General and others. 

Regarding the Medicaid drug rebate program, GAO and others have reported 

inadequacies in the Centers for Medicare & Medicaid Services’ (CMS) 

oversight of the prices manufacturers report to CMS to determine the 

statutorily required rebates owed to states. For example, GAO and others 

have reported a lack of clarity in CMS’s guidance to manufacturers for 

calculating these prices. Several recent legal settlements under which 

manufacturers agreed to pay hundreds of millions of dollars to states 

because they were alleged to report inaccurate prices to CMS highlight the 

potential for abuse under the program. CMS recently issued a proposed rule 

intended to provide more clarity to manufacturers in determining the prices 

they report. 

GAO and others have reported inadequacies in the Health Resources and 

Services Administration’s (HRSA) oversight of the 340B drug pricing

program and problems related to the lack of transparency in the maximum 

prices, called 340B prices, charged to eligible entities. GAO reported that 

HRSA did not routinely compare the prices actually paid by certain eligible

entities with the 340B prices and that many of these eligible entities paid 

prices higher than the 340B prices. Because these prices are not disclosed to 

the entities, the entities are unable to determine whether the prices they pay 

are at or below these prices. In addition, because 340B prices are based on 

information reported by drug manufacturers for the Medicaid drug rebate

program, inaccuracies under that program affect these prices. HRSA has 

made changes to its oversight of the program intended to address some of 

these concerns. 

The Medicare Part D program shares in common with other federal 

programs certain features that led to federal agency oversight challenges. 

For example, Part D relies on multiple private organizations to report to 

CMS certain price concessions from manufacturers, similar to the Medicaid 

drug rebate program. Also, Part D relies on CMS’s oversight to ensure that 

price information reported to it by private organizations are accurate, similar 

to the Medicaid drug rebate and 340B drug pricing programs. Other features 

of Part D, such as its reliance on contracts with private insurers to provide 

drug coverage to beneficiaries through a complex set of relationships and 

transactions with private entities, also suggest potential oversight 

challenges. 

Oversight inadequacies, inaccurate prices, lack of price transparency, and 

the potential for abuse suggest areas the Committee may wish to consider as

it develops its oversight agenda. The Committee may wish to consider the 

extent to which CMS and HRSA will systematically take steps to ensure the 

accuracy of prices reported and charged by private organizations that 

participate in federal programs. The Committee may also wish to consider

the extent to which federal agencies will effectively monitor for and detect 

abuses in the reporting of drug price information that affect these three 

federal programs. 

www.gao.gov/cgi-bin/getrpt?GAO-07-481T.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact John Dicken at 

(202) 512-7119 or dickenj@gao.gov. 
Mr. Chairman and Members of the Committee: 

I am pleased to be here today as you examine prescription drug pricing 

practices that affect federal programs that help pay for or reduce the cost 

of prescription drugs, and the implications for future congressional 

oversight of the programs. Spending on prescription drugs in this country 

has risen by about 11 percent on average each year from 1998 through 

2005 at retail outlets, faster than the average 7 percent yearly rate of 

increase in total U.S. health expenditures for health care services and 

supplies during the same period. Retail spending on prescription drugs 

from all sources in 2005 totaled about $201 billion, of which the federal

government spent about $33 billion under various programs.1

 The federal 

spending amount precedes the 2006 introduction of the Medicare 

prescription drug benefit, known as Medicare Part D, which increased 

federal spending on prescription drugs.2

 The amount the federal 

government spends for prescription drugs is related in part to the price 

information drug manufacturers report to federal programs. In addition, 

federal oversight designed to ensure the accuracy of that price information 

is an important part of the effort to control federal spending. 

To assist this committee as it develops its oversight agenda, you asked us

for information pertaining to federal agency oversight of prescription drug 

pricing practices that affect the Medicaid drug rebate program, the 340B 

drug pricing program,3

 and the Medicare Part D program. Accordingly, my

 1

Centers for Medicare & Medicaid Services (CMS), Trustees, National Health Expenditure,

Historical Data (Baltimore, Md: Centers for Medicare & Medicaid Services, 2007), 

http://www.cms.hhs.gov/NationalHealthExpendData/02_NationalHealthAccountsHistorical.

asp (accessed Jan. 9, 2007). The prescription drug spending figures reflect spending on

prescription drugs through retail outlets, such as retail pharmacies, but do not account for

spending through nonretail outlets, such as inpatient hospital or nursing home facility 

settings. 

2

The total federal contribution to Medicare Part D for 2006 is estimated at $58.3 billion, 

rising to $67.7 billion in 2007. See 2006 Annual Report of the Boards of Trustees of the

Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds

(Washington, D.C.: May 1, 2006). 

3

The joint federal-state Medicaid program finances medical services for certain low-income 

individuals. Within the Medicaid program, the Medicaid drug rebate program requires

participating drug manufacturers to pay rebates to states as a condition of the federal 

contribution for covered outpatient prescription drugs. The Medicaid and Medicaid drug 

rebate programs are administered by the Centers for Medicare & Medicaid Services (CMS).

Another federal program, the 340B drug pricing program, requires drug manufacturers that

participate in the Medicaid program to provide drugs at discounted prices to eligible 

entities such as community health centers. The 340B drug pricing program is administered 

by the Health Resources and Services Administration (HRSA). 

Page 1 GAO-07-481T
testimony today will focus on the oversight of drug pricing related to these 

three federal programs and the potential implications for future 

congressional oversight. My remarks today are based primarily on our 

2005 and 2006 reports examining federal programs that help pay for or 

reduce the cost of prescription drugs, which were done in accordance 

with generally accepted government auditing standards.4

 I will also refer to

related work by the Department of Health and Human Services Office of 

Inspector General (OIG) and others.

In summary, oversight inadequacies by federal agencies and a lack of 

transparency in drug pricing practices that affect federal programs have 

important implications for federal spending on prescription drugs. 

Regarding the Medicaid drug rebate program, we and others have reported 

inadequacies in the Centers for Medicare & Medicaid Services’ (CMS) 

oversight of the price information reported by manufacturers to determine 

the rebates owed to states, including a lack of clarity in CMS’s guidance to

manufacturers for calculating that price information. Recent litigation 

involving allegations that drug manufacturers reported inaccurate prices 

to CMS resulted in several manufacturers agreeing to pay about 

$88 million, $257 million, and $345 million to states, thus highlighting the 

potential for abuse under the program. CMS recently issued a proposed 

rule intended to provide more clarity to manufacturers in determining the 

prices they report to CMS. 

We and others have also reported inadequacies in the Health Resources 

and Services Administration’s (HRSA) oversight of the 340B drug pricing 

program, a lack of transparency in the 340B prices, and overpayments to 

drug manufacturers. We reported in 2006 that HRSA did not routinely 

compare the prices actually paid by eligible entities with the 340B prices 

and that many entities we reviewed paid prices for drugs that were higher 

than the 340B prices. Because 340B prices are not disclosed to the eligible

entities, the entities are unable to determine whether the prices they pay 

are at or below the 340B prices. In addition, because 340B prices are based 

on information reported by drug manufacturers for the Medicaid drug 

rebate program, inaccuracies in that information may affect 340B prices. 

 4

See GAO, Medicaid Drug Rebate Program: Inadequate Oversight Raises Concerns About 

Rebates Paid to States, GAO-05-102 (Washington, D.C.: Feb. 4, 2005); GAO, Ryan White

Care Act: Improved Oversight Needed to Ensure AIDS Drug Assistance Programs Obtain

Best Prices for Drugs, GAO-06-646 (Washington, D.C.: Apr. 26, 2006); and GAO, Medicare: 

CMS’s Implementation and Oversight of the Medicare Prescription Drug Discount Card

and Transitional Assistance Program, GAO-06-78R (Washington, D.C.: Oct. 28, 2005). 

Page 2 GAO-07-481T
HRSA has made changes to its oversight of the 340B drug pricing program 

that are intended to address some of these concerns. 

The Medicare Part D program shares in common with other federal 

programs certain features that led to federal agency oversight challenges 

related to the reporting of inaccurate price information in those programs. 

For example, the Medicare Part D program relies on private organizations 

that sponsor drug plans to calculate and report price information to CMS, 

much like the Medicaid drug rebate program relies on drug manufacturers 

to calculate and report drug pricing and price concession information to 

CMS. Also, the Medicare Part D program relies on CMS’s oversight to 

ensure that price information reported to it by private organizations is 

accurate, similar to the Medicaid drug rebate and 340B pricing programs. 

Other features of the Medicare Part D program, such as its reliance on 

contracts with multiple private insurers to provide drug coverage to 

beneficiaries through a complex set of relationships and transactions with 

private entities, also suggest areas of potential oversight vulnerability. 

Although actions taken by both CMS and HRSA may address some of the 

oversight inadequacies we and others have reported, it is too soon to know 

how effective these actions have been in improving program oversight. 

Thus concerns about oversight inadequacies, inaccurate price information, 

lack of price transparency, and the potential for abuse associated with 

federal programs that help pay for or reduce the cost of prescription drugs 

suggest areas the Committee may wish to consider as it develops its 

oversight agenda. For example, the Committee may wish to consider the 

extent to which CMS and HRSA will take steps to systematically ensure 

the accuracy of price information reported by private sector organizations

that participate in federal programs, and the extent to which cognizant 

federal agencies will effectively monitor for and detect abuses in the 

reporting of drug price information that affects the Medicaid drug rebate, 

the 340B drug pricing, and the Medicare Part D programs. 

The Medicaid drug rebate program, the 340B drug pricing program, and 

the Medicare Part D program help pay for or reduce the costs of 

prescription drugs for eligible individuals and entities. 

Background 

Page 3 GAO-07-481T
Medicaid is the joint federal-state program that finances medical services 

for certain low-income adults and children. CMS, an agency of the 

Department of Health And Human Services (HHS), administers and 

oversees the program. While some benefits are federally required, 

outpatient prescription drug coverage is an optional benefit that all states

have elected to offer. State Medicaid programs, though varying in design,

cover both brand and generic drugs. Retail pharmacies distribute drugs to

Medicaid beneficiaries, then receive reimbursements from states for the 

acquisition cost of the drug and a dispensing fee. In 2004, Medicaid 

outpatient prescription drug spending reached $31 billion, of which 

$19 billion was paid by the federal government. 

The Medicaid Drug Rebate 

Program 

To help control Medicaid drug spending, federal law requires 

manufacturers to pay rebates to states as a condition for the federal 

contribution toward covered outpatient prescription drugs.5

 Rebates 

manufacturers must pay states for brand drugs under the Medicaid drug 

rebate program are based on two prices that drug manufacturers must 

report to CMS: the average manufacturer price (AMP) (the average price

paid to a manufacturer by wholesalers for drugs distributed to the retail 

pharmacy class of trade) and best price (the lowest price available from 

the manufacturer to any purchaser with certain exceptions).6

 Both 

amounts are to reflect certain financial concessions that are available to 

drug purchasers. The statute governing the program and the standard 

rebate agreement that CMS signs with each manufacturer define AMP and 

best price and specify how these prices are to be used to determine the 

rebates due to states. CMS provides additional guidance to manufacturers 

regarding the calculation of these amounts. After manufacturers report the 

required price information to CMS, CMS uses it to calculate the rebate due 

for each unit of a brand drug and reports this to the states. The state 

Medicaid programs use the information to determine the amount of 

rebates to which they are entitled from the manufacturers based on the 

volume of drugs paid for by the programs. 

 5

See 42 U.S.C. § 1396r-8. 

6

The basic unit rebate amount for a brand name drug is the difference between best price 

and AMP or 15.1 percent of AMP, whichever is greater. 

Page 4 GAO-07-481T
The 340B drug pricing program7

 gives more than 12,000 eligible entities of 

various types—community health centers, disproportionate share 

hospitals, and AIDS Drug Assistance Programs (ADAP)8

 among them—

access to discounted drug prices, called 340B prices. To access these 

prices, entities must enroll in the program, which is administered by 

HRSA. Drug manufacturers must offer covered drugs to enrolled entities at

or below 340B prices in order to have their drugs covered by Medicaid.9

Enrolled entities may generally purchase drugs in two ways. They may 

choose the direct purchase option to receive the 340B prices up front, or 

they may choose the rebate option, typically purchasing drugs through a

vendor and later receiving a rebate from the manufacturer covering any 

amount they paid above the 340B prices. Enrolled entities spent an 

estimated $3.4 billion on drugs in 2003. 

The 340B Drug Pricing 

Program 

To determine the 340B prices, HRSA uses a statutory formula that relies 

on AMP and Medicaid rebate data that it receives from CMS.10

Manufacturers separately calculate the 340B prices for their drugs using 

the statutory formula, and use these calculations as the basis for the prices 

they charge eligible entities. HRSA does not share the 340B prices with the 

eligible entities due to the statutory provisions regarding the

confidentiality of information used to determine them.11

 7

The 340B drug pricing program is named for the statutory provision authorizing it, section 

340B of the Public Health Service Act (codified at 42 U.S.C. § 256b). 

8

Among other services, community health centers offer primary and preventive health 

services to low-income individuals. Disproportionate share hospitals are hospitals that 

serve a relatively large volume of low-income patients and are eligible for payment 

adjustments under Medicare or Medicaid. ADAPs purchase HIV/AIDS drugs for enrolled

low-income people who are uninsured or underinsured. 

9

If a drug manufacturer fails to sell drugs at or below the 340B prices, it can be dropped as

a participating drug provider in the 340B and Medicaid programs. 

10In general, the 340B price for a covered outpatient drug is based on AMP and the total

unit rebate amount for the drug. HRSA began calculating the 340B prices on October 1, 

2005. Previously, CMS performed the calculations. 

11According to OIG, the confidentiality provision in the Medicaid drug rebate program 

statute related to AMP has been interpreted to mean that HRSA may not reveal the 340B

prices to the entities. Testimony of Stuart Wright, Deputy Inspector General for Evaluation 

and Inspections, Office of Inspector General, U.S. Department of Health and Human 

Services, before the House Committee on Energy and Commerce Subcommittee on 

Oversight and Investigations, December 15, 2005. 

Page 5 GAO-07-481T
The Medicare Prescription Drug, Improvement, and Modernization Act of 

2003 (MMA) created a voluntary outpatient prescription drug benefit 

effective January 1, 2006, as Part D of the Medicare program.12 Under 

Part D, Medicare beneficiaries may choose a prescription drug plan (PDP) 

from multiple competing PDPs offered by private organizations, often 

private insurers, that sponsor the plans. PDP sponsors enter into contracts 

with CMS, the agency that administers Medicare. PDPs may differ in the 

drugs they cover, the pharmacies they use, and the prices they negotiate 

with drug manufacturers and pharmacies. PDP sponsors may use 

pharmacy benefit managers (PBM) to negotiate with drug manufacturers 

and retail pharmacies for the prices of the drugs that each PDP covers.13,14

PDP sponsors are required to report to CMS the price concessions they 

negotiate; these price concession include discounts, rebates, direct or 

indirect subsidies, and direct or indirect remunerations. 

The Medicare Part D 

Program 

 12Pub. L. No. 108-173, § 101, 117 Stat. 2066, 2071-2152 (codified at 42 U.S.C. §§ 1395w-101 to 

1395w-152). MMA redesignated the previous Part D of title XVIII of the Social Security Act 

as Part E and inserted a new Part D after Part C. 

13In the private health insurance market, health plans typically contract with PBMs to help 

manage their prescription drug benefits. PBMs negotiate rebates or payments with drug 

manufacturers, encourage substitution of generic drugs for therapeutically similar brand 

drugs, and negotiate discounted prices with networks of retail and mail-order pharmacies,

passing along at least some of the savings to health plans and enrollees. PBMs influence 

price negotiations with manufacturers through formulary development and management 

and through the large market share they often represent. 

14MMA prohibits the Secretary of Health and Human Services from interfering with price

negotiations between PDP sponsors and drug manufacturers and pharmacies. Pub. L. 

No. 108-173, § 101, 117 Stat. 2066, 2098 (codified at 42 U.S.C. § 1395w-111(i)). 

Page 6 GAO-07-481T
We and others have reported inadequacies in CMS’s oversight of the price

information reported by manufacturers under the Medicaid drug rebate 

program, including a lack of clarity in CMS’s guidance to the

manufacturers for calculating prices. We reported in 2005 that CMS 

conducted only limited checks for errors in manufacturer-reported drug 

prices and that it did not generally review the methods and underlying 

assumptions that manufacturers use to determine AMP and best prices.15

We also noted in that report that OIG found that CMS did not provide clear 

program guidance for manufacturers to follow when determining those 

prices—for example, how to treat sales to certain health maintenance 

organizations (HMO) and PBMs.16 OIG stated that its review efforts were 

hampered by unclear CMS guidance on how manufacturers were to 

determine AMP, a lack of manufacturer documentation, or both. Our 

review also examined the pricing methodologies of several large drug 

manufacturers and found considerable variation in the methods they used

to determine AMP and best price, and some of these differences could 

have affected the accuracy of these prices and thereby reduced or 

increased rebates to state Medicaid programs. OIG similarly identified 

problems with manufacturers’ price determination methods and their 

reported prices in four reports issued from 1992 to 2001.17

Oversight 

Inadequacies in the 

Medicaid Drug Rebate 

Program Raise 

Concerns about the 

Accuracy of Rebates 

Paid to States 

Recent litigation has highlighted the importance of the accuracy of prices 

manufacturers report to CMS and the rebates they pay to states. For 

example, two drug manufacturers agreed to pay about $88 million and 

$257 million, respectively, to states in 2003 to settle allegations that they 

failed to include in their best price determinations certain sales to an 

HMO.18 Another manufacturer agreed to pay $345 million to states in 2004 

 15See GAO, Medicaid Drug Rebate Program: Inadequate Oversight Raises Concerns about 

Rebates Paid to States, GAO-05-102 (Washington, D.C.: Feb. 4, 2005). 

16When the Medicaid drug rebate program began in 1991, PBMs played a much smaller role

in the market.

17See Department of Health and Human Services, Office of Inspector General, Medicaid 

Drug Rebates: The Health Care Financing Administration Needs to Provide Additional 

Guidance to Drug Manufacturers to Better Implement the Program, A-06-91-00092 

(Washington, D.C.: November 1992) and Medicaid Drug Rebates: Sales to Repackagers 

Excluded from Best Price Determinations, A-06-00-00056 (Washington, D.C.: March 2001). 

The other two reports focused on individual manufacturers and are not publicly available. 

Federal law permits the Secretary of Health and Human Services to verify manufacturerreported prices, and the Secretary has delegated that authority to OIG. OIG regularly 

conducts audits, evaluations, and investigations pertaining to HHS programs. 

18Department of Health and Human Services and Department of Justice, Health Care Fraud

and Abuse Control Program Annual Report for FY 2003 (Washington, D.C.: 2004). 

Page 7 GAO-07-481T
to settle several allegations, including that it did not account for drug 

discounts provided to two health care providers, resulting in an overstated 

best price for one of its top-selling drugs and reduced state rebates.19

CMS issued a proposed rule in December 200620 to, among other things, 

implement provisions of the Deficit Reduction Act of 200521 (DRA) related 

to prescription drugs under the Medicaid program. This rule is intended to

provide more clarity to manufacturers in determining AMPs reported to 

CMS, by indicating which sales, discounts, rebates, and price concessions 

are to be included or excluded. For example, it specifies that sales to 

PBMs and mail-order pharmacies must be included in AMP. The proposed 

rule also specifies that best price must include sales to all purchasers, 

including HMOs, that are not explicitly excluded and specifies the prices 

that must be included or excluded from those sales. Recognizing the 

evolving marketplace for the sale of prescription drugs, the proposed rule 

states that CMS plans to issue future clarifications of AMP and best price 

in an expeditious manner. In its notice of proposed rulemaking, CMS also 

referred to the DRA requirement that CMS disclose AMP data to states and 

post these data on a public Web site. AMP data are currently not made 

public. The changes represented by this proposed rule would likely affect

the prices that manufacturers report to the federal government. Only after 

these regulations are finalized and implemented will there be an 

opportunity to assess the extent to which they improve the accuracy of 

prices reported and rebates paid by manufacturers. 

 19Department of Health and Human Services and Department of Justice, Health Care Fraud

and Abuse Control Program Annual Report for FY 2004 (Washington, D.C.: September

2005). 

2071 Fed. Reg. 77174 (Dec. 22, 2006). 

21Pub. L. No. 109-171, §§ 6001-6003, 120 Stat. 4, 54-61. 

Page 8 GAO-07-481T
We and others have reported inadequacies in HRSA’s oversight of the 340B

drug pricing program, problems related to the lack of transparency in the 

340B prices, and overpayments to drug manufacturers. OIG recently

reported that some of the 340B prices that HRSA calculated were 

inaccurate and that HRSA did not systematically compare the 340B prices 

with those that were separately calculated by drug manufacturers for 

consistency.22 In addition, we recently reported that HRSA did not 

routinely compare 340B prices with prices paid by certain eligible entities. 

We and OIG both found that many entities reviewed paid prices for drugs 

that were higher than the 340B prices.

23 OIG estimated that 14 percent of 

total drug purchases made by entities in June 2005 exceeded the 340B 

prices, resulting in $3.9 million in overpayments. We also found that the 

prices of the eligible entities using the rebate option reported to HRSA did 

not reflect all rebates they later received from manufacturers, and thus we 

could not determine whether these entities paid prices that were at or 

below the ceiling established by the 340B prices. Because the 340B prices 

are not disclosed to eligible entities, the entities cannot know how the 

prices they pay compare with the 340B prices. Finally, because 340B 

prices are based on AMP and Medicaid drug rebate data, inaccuracies in

those amounts affect the 340B drug pricing program. 

Oversight 

Inadequacies and 

Lack of Transparency 

in the 340B Drug 

Pricing Program Raise 

Concerns about 

Overpayments to 

Drug Manufacturers 

Recent legal settlements related to drug manufacturers’ overstatement of 

best prices used in the Medicaid rebate program also led to settlements 

related to the 340B program. This was because overstated best prices 

could affect rebates and result in inaccurate 340B prices. 

HRSA has made changes to its oversight of the 340B drug pricing program 

that are intended to address some of the concerns we and OIG raised in 

our respective reports. For example, while manufacturers are not required

to submit their calculated 340B prices to HRSA, the agency has requested

that each manufacturer voluntarily submit its calculated 340B prices for 

comparison to the 340B prices calculated by HRSA.

24 It has also indicated

 22See Department of Health and Human Services, Office of Inspector General, Deficiencies 

in the Oversight of the 340B Drug Pricing Program, OEI-05-02-00072 (Washington, D.C.: 

October 2005), and Review of 340B Prices, OEI-05-02-00073 (Washington, D.C.: July 2006). 

23See GAO, Ryan White Care Act: Improved Oversight Needed to Ensure AIDS Drug 

Assistance Programs Obtain Best Prices for Drugs, GAO-06-646 (Washington, D.C.: 

Apr. 26, 2006). We found that in 2003, all of the ADAPs we reviewed that used the direct

purchase option reported paying prices higher than the 340B prices for at least 1 of the top 

10 HIV/AIDS drugs purchased in 2003. 

24HRSA indicated that as of July 2006, more than 50 manufactures had submitted their data. 

Page 9 GAO-07-481T
that it was planning to develop systems to allow eligible entities to check

that the drug prices they are charged are appropriate while still 

maintaining the confidentiality of those prices. Because AMP is used to 

calculate 340B prices, the requirement under DRA that AMP become 

publicly available may enable HRSA to improve the transparency of these

prices. However, the public reporting of AMP, which is only one element

of the 340B price calculation, can only partially improve the transparency

of 340B prices. 

The Medicare Part D program shares in common certain features with 

other federal programs that help pay for or reduce the cost of prescription 

drugs. Because these features presented oversight challenges with other 

programs, they may also present challenges for Part D. Some of the 

common features include the following: 

• Under Medicare Part D, PDP sponsors are required to calculate and report 

to CMS aggregate price concessions they negotiate. Similarly, the Medicaid 

drug rebate program requires manufacturers to calculate and report 

certain price information to CMS and to include various price concessions 

in the calculations. 

• Medicare Part D relies on PDP sponsors to pass on to beneficiaries the 

benefit of price concessions they negotiate with drug manufacturers. 

Similarly, the Medicaid drug rebate and 340B drug pricing programs rely 

on manufacturers to pass on to states or eligible entities the rebates or 

discounted prices to which they are entitled under the programs. 

Medicare Part D 

Shares Features with 

Other Federal 

Programs and Has 

Certain Features 

That Suggest 

Potential Oversight 

Challenges 

• Medicare Part D relies on CMS to audit PDP sponsors to ensure proper 

disclosure of price concessions negotiated with manufacturers. Similarly, 

the Medicaid drug rebate and 340B drug pricing programs rely on federal

audits of manufacturers to ensure that the prices reported and charged are 

appropriate.

Further, the Medicare Part D program shares in common with the 

Medicare prescription drug discount card program—which preceded 

Part D—features related to oversight inadequacies we identified with the 

discount card program. Under the discount card program, private 

sponsors negotiated drug discounts for beneficiaries and required the card 

sponsors to report price concessions they received for drugs and pass a 

share of these on to beneficiaries. We reported in 2005 that some card 

sponsors found that the guidance relating to the reporting of price 

concessions provided by CMS lacked clarity, and CMS reported that the 

Page 10 GAO-07-481T
quality of price concession data provided by card sponsors was 

questionable, with problems such as missing data.25

Two other features of the Medicare Part D program suggest potential 

oversight challenges. The first relates to the transition of the nearly 

6 million typically high-cost individuals who qualify for both Medicaid and 

Medicare—referred to as dual eligibles—from Medicaid to Medicare 

Part D for prescription drug coverage. While the Medicaid drug rebate 

program is designed to help control prescription drug spending by 

requiring manufacturers to pay rebates to states, Medicare Part D relies on 

PDP sponsors to negotiate drug prices, including price concessions. Part D 

provides no assurance that the PDP sponsors will be able to negotiate 

price concessions that are as favorable as the rebates required under the 

Medicaid program. It is not yet known how the federal cost of prescription 

drug coverage for dual eligibles under Part D will compare with the costs 

incurred for these individuals under Medicaid. 

The second feature relates to the Part D program’s reliance on contracts 

with private PDP sponsors. The PDP sponsors provide prescription drug 

coverage to beneficiaries through a complex set of relationships and 

transactions among insurers, PBMs, and drug manufacturers. These 

relationships have similarities to the Federal Employees Health Benefits 

Program (FEHBP), the health care program for federal employees, in 

which the federal government contracts with private organizations to 

provide drug benefits, and these organizations often contract with PBMs 

to negotiate with manufacturers and provide other administrative and 

clinical services.26 The relationships and transactions between PBMs and 

 25See GAO, Medicare: CMS’s Implementation and Oversight of the Medicare Prescription 

Drug Discount Card and Transitional Assistance Program, GAO-06-78R (Washington, 

D.C.: Oct. 28, 2005). To assist Medicare beneficiaries with their prescription drug costs

before the new benefit became available, the MMA required the establishment of a 

temporary Medicare Prescription Drug Discount Card and Transitional Assistance 

Program, which began in June 2004. See Pub. L. No. 108-173, § 101, 117 Stat. 2066, 2131. The

drug discount card program offered Medicare beneficiaries access to discounts off the 

retail price of prescription drugs at the point of sale. The program was discontinued when

the new Part D drug benefit became available in 2006. 

26FEHBP covers about 8 million federal employees, retirees, and their family members, 

making it the largest employer-based health insurance program in the country. In 2003 we

reported on the relationships between the private insurers that provide coverage to federal 

employees under the FEHBP and the PBMs that administer the prescription drug benefit 

for most FEHBP enrollees. See GAO, Federal Employees’ Health Benefits: Effects of Using 

Pharmacy Benefit Managers on Health Plans, Enrollees, and Pharmacies, GAO-03-196 

(Washington, D.C.: Jan. 10, 2003). 

Page 11 GAO-07-481T
drug manufacturers within FEHBP and other federal programs have been

the subject of litigation. For example, a large PBM agreed to pay about

$138 million to the federal government in 2005, including about $55 million 

to the FEHBP, to settle allegations that it had received payments from 

drug manufacturers in exchange for marketing certain drugs made by 

those manufacturers to providers who are reimbursed by federal 

programs.27

Although actions taken by both CMS and HRSA may address some of the 

oversight inadequacies we and others have reported, it is too soon to know 

how effective these have been in improving program oversight. Thus, 

concerns about prescription drug pricing inaccuracies in the Medicaid 

drug rebate and 340B drug pricing programs and overpayments to drug 

manufacturers highlight the importance of federal oversight of prices 

reported by drug manufacturers under these programs. Because the new 

Medicare Part D program shares certain features in common with these 

programs, oversight of the price information reported under Part D is 

important as well. As the Committee develops its oversight agenda relating

to federal programs that help pay for or lower the costs of prescription 

drugs, it may wish to consider the following areas. 

Potential Areas for 

Future Congressional 

Oversight 

• The extent to which federal agencies will take steps to systematically 

ensure the accuracy of price data associated with federal programs, 

specifically,

• the extent to which CMS will ensure that AMP and best prices reported 

by manufacturers under the Medicaid drug rebate program include all

appropriate transactions and price concessions—particularly once the 

proposed rule is finalized; 

• the extent to which HRSA will ensure the completeness and accuracy 

of the 340B prices it maintains, obtain final prices paid by all covered 

entities, and more systematically compare prices paid by entities with 

the 340B prices; and 

 27Department of Health and Human Services and Department of Justice, Health Care Fraud

and Abuse Control Program Annual Report for FY 2005 (Washington, D.C.: August 2006), 

and the Office of Personnel Management, Office of the Inspector General, Semiannual 

Report to Congress (Washington, D.C.: Nov. 1, 2005). 

Page 12 GAO-07-481T
• the measures CMS will take to ensure that the price information Part D 

sponsors report to CMS include aggregate price concessions sponsors 

negotiate with PBMs and drug manufacturers. 

• Recognizing the evolving nature of purchasers and sellers in the 

prescription drug market, the extent to which CMS will be effective in 

updating and revising Medicaid drug rebate program pricing guidance for 

manufacturers as circumstances warrant. 

• The extent to which the transition of dual eligibles from Medicaid to 

Medicare Part D will affect federal spending. 

• The extent to which cognizant federal agencies will monitor for and detect 

abuses in the reporting of drug price information that affects federal 

programs. 

Mr. Chairman, this concludes my prepared remarks. I would be happy to 

answer any questions that you or other Members of the Committee may 

have. 

For future contacts regarding this testimony, please contact John Dicken 

at (202) 512-7119 or at dickenj@gao.gov. Contact points for our Offices of 

Congressional Relations and Public Affairs may be found on the last page 

of this testimony. Randy DiRosa, Assistant Director; Gerardine Brennan; 

Martha Kelly; Stephen Ulrich; and Timothy Walker made key contributions 

to this statement. 

GAO Contacts and 

Acknowledgments 

(290605) Page 13 GAO-07-481T
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