MEDICARE PART D 

COVERAGE GAP

Discount Program 

Effects and 

Brand-Name Drug 

Price Trends 

Report to Congressional Requesters

September 2012

GAO-12-914

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United States Government Accountability Office

GAO
United States Government Accountability Office

Highlights of GAO-12-914, a report to 

congressional requesters

September 2012

MEDICARE PART D COVERAGE GAP

Discount Program Effects and Brand-Name Drug 

Price Trends 

Why GAO Did This Study

The Patient Protection and Affordable 

Care Act of 2010 established the 

Discount Program to help Medicare 

Part D beneficiaries with their 

prescription drug costs while in the 

coverage gap, which occurs between 

the initial and catastrophic coverage 

periods where Medicare helps pay for 

drug costs. Until the Discount Program 

began in 2011, beneficiaries in the 

coverage gap paid 100 percent of drug 

costs. The Discount Program required 

manufacturers to provide a 50 percent 

discount on the price of brand-name 

drugs for beneficiaries in the gap. 

GAO was asked to describe (1) CMS’s 

oversight of the Discount Program; 

(2) perspectives of plan sponsors, 

manufacturers, and PBMs on effects of 

the Discount Program; and (3) how 

prices for brand-name drugs used by 

beneficiaries in the coverage gap and 

by those who did not reach the gap 

changed before and after the start of 

the Discount Program. To describe 

CMS’s oversight, GAO reviewed CMS 

documents and interviewed CMS 

officials. To describe perspectives on 

the effects of the Discount Program, 

GAO interviewed the 7 largest Part D 

plan sponsors based on enrollment 

data, 8 of 10 manufacturers of brandname drugs with the highest 

expenditures in the gap, and 3 PBMs 

who contracted with sponsors GAO 

interviewed. To describe price 

changes, GAO used CMS Part D data 

from 2007 to 2011 to track prices for 

high-expenditure brand-name drugs

used by those in and those who did not 

reach the gap. GAO compared prices 

for the two baskets because drugs 

used by those in the gap may be more 

susceptible to price increases since 

manufacturers must provide the 

discount for these drugs. 

What GAO Found

As part of Medicare’s Part D Coverage Gap Discount Program (Discount 

Program), the Centers for Medicare & Medicaid Services (CMS), located within 

the Department of Health and Human Services (HHS), oversees the provision of 

discounts by plan sponsors to eligible beneficiaries when they purchase brandname drugs and monitors that discounts are paid for by drug manufacturers. 

CMS checks prescription drug data to verify that sponsors provide accurate 

discounts at the point-of-sale to eligible beneficiaries in the coverage gap. These 

checks include verifying whether a beneficiary has reached the coverage gap 

and that the plan sponsor has calculated the discount amount correctly. CMS 

also tracks that manufacturers pay plan sponsors for the discounts sponsors 

have provided to beneficiaries and has implemented a dispute resolution process 

for manufacturers disputing discount payment amounts. CMS also performs 

other activities such as monitoring beneficiary complaints related to the program. 

The plan sponsors, pharmacy benefit managers (PBM) that negotiate on behalf 

of plan sponsors, and drug manufacturers GAO interviewed had different 

perspectives on aspects of the drug pricing and plan design effects of the 

Discount Program. Most sponsors and PBMs believed the Discount Program 

may have been a contributing factor in the rising prices of some brand-name 

drugs by some manufacturers. However, most manufacturers did not believe the 

Discount Program affected drug prices they negotiated with sponsors and PBMs. 

The PBMs we interviewed also told us they observed that some manufacturers 

decreased the amount of rebates for the brand-name drugs they offered, which 

they believe occurred as a result of the Discount Program. In comparison, most 

of the plan sponsors did not observe manufacturers decreasing rebate amounts 

and most manufacturers reported no effects on their rebate negotiations as a 

result of the Discount Program. Most sponsors and PBMs told GAO that the 

Discount Program did not affect Part D plan formularies, plan benefit designs, or 

utilization management practices.

GAO found that the prices for high-expenditure brand-name drugs used by 

beneficiaries in the coverage gap and by those who did not reach the gap in 

2011 increased at a similar rate before and after the Discount Program was 

implemented in January 2011. Specifically, from January 2007 to December 

2010, before the Discount Program began, the median price for the basket of

77 brand-name drugs (weighted by the utilization of each drug) used by 

beneficiaries in the coverage gap increased 36.2 percent. During the same 

period, the median price for the basket of 78 brand-name drugs used by 

beneficiaries who did not reach the coverage gap increased 35.2 percent. From 

December 2010 through December 2011, the first year with the Discount 

Program, the median price for the two baskets increased equally by about 

13 percent, the greatest increase in median price for both baskets compared to 

earlier individual years. 

HHS reviewed a draft of this report and in its written comments noted that GAO’s 

findings on stakeholder perspectives and changes in brand-name drug prices 

were consistent with its experience and CMS’s drug price analysis. HHS stated 

that CMS will continue to monitor the Discount Program and Part D drug prices. 

View GAO-12-914. For more information, 

contact John Dicken at (202) 512-7114 or 

DickenJ@gao.gov.
Page i GAO-12-914 Medicare Part D Discount Program

Letter 1 

Background 5

CMS Oversees Coverage Gap Discounts Provided by Plan Sponsors 

and Paid for by Manufacturers 15

Plan Sponsors, PBMs, and Manufacturers Had Different 

Perspectives on Aspects of the Drug Pricing and Plan Design 

Effects of the Discount Program 20

Prices Increased at a Similar Rate for Brand-Name Drugs Used by 

Beneficiaries in the Coverage Gap and by Those Who Did Not 

Reach the Gap 23

Agency Comments 26

Appendix I Methodology for Examining Brand-Name Drug Price Trends 28

Appendix II Brand-Name Drugs Included in Price Trend Analyses 33

Appendix III How the Discount Program Works at the Point-of-Sale for 

Brand-Name Drugs 37

Appendix IV Comments from the Department of Health and Human Services 39

Appendix V GAO Contact and Staff Acknowledgments 40

Related GAO Products 41

Tables

Table 1: Medicare Enrollment by Plan Type and Income Subsidy 

Status, 2011 6

Table 2: Coinsurance Paid by Non-LIS beneficiaries While in the 

Coverage Gap for Brand-Name and Generic Drugs, 2011 to 

2020 12

Contents
Page ii GAO-12-914 Medicare Part D Discount Program

Table 3: The High-Expenditure Brand-Name Drugs Used by NonLIS Beneficiaries in the Coverage Gap and by Those Who 

Did Not Reach the Coverage Gap in 2011 33

Figures

Figure 1: Comparison of a Non-LIS Beneficiary’s Out-of-Pocket 

Spending for Prescription Drugs in the Coverage Gap 

under the Standard Benefit in 2011, without and with the 

Medicare Coverage Gap Discount Program in Place 13

Figure 2: Price Indexes for Brand-Name Drugs Used by Medicare 

Part D Beneficiaries in the Coverage Gap and by Those 

Who Did Not Reach the Gap in 2011 24

Figure 3: Annual Percent Change in Price for Brand-Name Drugs 

Used by Medicare Part D Beneficiaries in the Coverage 

Gap and by Those Who Did Not Reach the Gap in 2011 25

Figure 4: Hypothetical Example: A Non-LIS Beneficiary in a 

Standard Benefit Plan Purchasing a Brand-Name Drug 

While in the Coverage Gap in 2011 38
Page iii GAO-12-914 Medicare Part D Discount Program

Abbreviations

CMS Centers for Medicare & Medicaid

 Services

Discount Program Medicare Coverage Gap Discount

 Program

Discount Program Agreement Coverage Gap Discount Program 

 Agreement 

DR delayed release

ER extended release

FDA Food and Drug Administration

HCERA Health Care and Education 

 Reconciliation Act of 2010

HCT hydrochlorothiazide

HFA hydrofluoroalkanes

HHS Department of Health and Human 

 Services 

LA long acting

LIS low-income subsidy

MA-PDP Medicare Advantage prescription

 drug plan

MedPAC Medicare Payment Advisory

 Commission

MMA Medicare Prescription Drug,

 Improvement, and Modernization 

 Act of 2003

NDC national drug code

NDC-9 nine-digit national drug code

PBM pharmacy benefit manager

PDE prescription drug event

PDP stand-alone prescription drug plan

PPACA Patient Protection and Affordable Care

 Act

TPA third-party administrator

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Page 1 GAO-12-914 Medicare Part D Discount Program

United States Government Accountability Office

Washington, DC 20548

September 28, 2012

The Honorable Max Baucus

Chairman

Committee on Finance

United States Senate

The Honorable Henry A. Waxman

Ranking Member

Committee on Energy and Commerce

House of Representatives

The Honorable Sander M. Levin

Ranking Member

Committee on Ways and Means

House of Representatives

The Honorable John D. Dingell

House of Representatives

In 2011, approximately 29 million Medicare beneficiaries were enrolled in 

Medicare’s outpatient prescription drug benefit, known as Part D. Prior to 

2011, many Medicare beneficiaries with Part D prescription drug 

coverage paid 100 percent of their drug costs while in the coverage gap 

or “donut hole.” The coverage gap occurs between the initial and 

catastrophic coverage periods, during which Medicare payments reduce 

beneficiaries’ costs. The Medicare Coverage Gap Discount Program 

(Discount Program), established by the Patient Protection and Affordable 

Care Act (PPACA) in 2010, was implemented in 2011 as part of an effort 

to assist beneficiaries who do not receive Part D’s low-income subsidy 

(LIS) with their drug costs when they reach the coverage gap.1

 

1

For purposes of this report, references to PPACA include the amendments made by 

the Health Care and Education Reconciliation Act of 2010 (HCERA). Pub. L. No. 111-148, 

§ 3301,124 Stat. 119, 461 (2010), as amended by HCERA, Pub. L. No. 111-152, 

§§ 1101(b), (d), 124 Stat. 1029, 1037, 1039 (amending various sections of Subtitle D of 

Title XVIII of the Social Security Act (codified at 42 U.S.C. §§ 1395w-101 et seq.)). 

Beneficiaries receiving Part D’s LIS have limited income and resources and are eligible for 

subsidies paid by Medicare to the drug plan in which they are enrolled. LIS beneficiaries 

are not eligible for the Discount Program.

 
 

Page 2 GAO-12-914 Medicare Part D Discount Program

Beginning in January 2011, PPACA required that drug manufacturers 

wishing to have their drugs covered under the Part D program participate 

in the Discount Program, which requires them to provide a 50 percent 

discount on the price that Part D plan sponsors2 negotiate for brand-name 

drugs when beneficiaries reach the coverage gap.3

You raised concerns that manufacturers participating in the Discount 

Program may raise prices for brand-name drugs used by beneficiaries 

who are in the coverage gap more rapidly than for other drugs to offset 

the 50 percent discount that manufacturers are required to give these 

drugs. You also asked us to describe the oversight that the Centers for 

Medicare & Medicaid Services (CMS), located within the Department of 

Health and Human Services (HHS), provides of the new Discount 

Program and the potential effects of the new program. In this report, we 

describe (1) CMS’s oversight activities for the Discount Program; (2) the 

perspectives of Medicare Part D plan sponsors, drug manufacturers, and 

pharmacy benefit managers (PBM) on the effects of the Discount 

Program; and (3) how prices changed before and after implementation of 

the Discount Program for brand-name drugs used by beneficiaries who 

did and beneficiaries who did not reach the coverage gap in 2011.

Under PPACA, 

Medicare will provide a subsidy over time to cover more of beneficiaries’ 

spending when they reach the coverage gap so that by 2020 the 

coverage gap is eliminated. The 50 percent discount that brand-name 

manufacturers must pay for brand-name drugs is permanent.

To describe CMS’s oversight activities for the Discount Program, we 

reviewed relevant laws, such as PPACA, and regulations, as well as 

guidance that CMS provided to plan sponsors and drug manufacturers 

clarifying various policy and technical aspects of the Discount Program. 

We also reviewed CMS’s Coverage Gap Discount Program Agreement 

(Discount Program Agreement), the contract between CMS and drug 

manufacturers outlining CMS’s oversight responsibilities for the Discount 

Program and drug manufacturers’ obligation to provide discounts for 

 

2

Plan sponsors, often private insurers, contract with the Centers for Medicare & Medicaid 

Services to offer the prescription drug benefit.

3

A brand-name drug is a drug marketed under a proprietary, trademark-protected name. 

Pharmacy benefit managers may also negotiate brand-name drug prices on behalf of plan 

sponsors.
 

Page 3 GAO-12-914 Medicare Part D Discount Program

brand-name drugs to eligible beneficiaries in the coverage gap.4

We also interviewed a sample of Medicare Part D plan sponsors, PBMs, 

and drug manufacturers to describe their perspectives on the effects of 

the Discount Program. To select our sample of plan sponsors to 

interview, we used Medicare Part D enrollment data provided by CMS to 

identify the plan sponsors with the highest non-LIS beneficiary enrollment 

in Medicare Part D as of January 1, 2011.

We also 

interviewed CMS officials to obtain information on CMS’s oversight 

activities, including steps the agency has taken to monitor manufacturers’ 

and plan sponsors’ adherence to their Discount Program responsibilities, 

as outlined in the Discount Program Agreement, and whether the agency 

has reviewed outcomes related to the program.

5 We interviewed the seven 

largest plan sponsors that represented about 68 percent of total non-LIS 

enrollment in Medicare Part D as of January 1, 2011. Additionally, we 

interviewed three PBMs that contracted with at least one of the plan 

sponsors we interviewed. To select our sample of drug manufacturers to 

interview, we used 2011 Medicare Part D prescription drug event (PDE) 

data provided by CMS to identify the top 10 manufacturers whose brandname drugs accounted for the highest total drug expenditures used by 

non-LIS Medicare Part D beneficiaries in the coverage gap in 2011.6 Of 

the top 10 manufacturers, we interviewed 8 manufacturers that 

represented about 54 percent of the total expenditures for brand-name 

drugs used by non-LIS beneficiaries who reached the coverage gap in 

2011. We used structured interview protocols to gather consistent 

information about the perspectives of each entity on the effects of the 

Discount Program, such as any changes in drug prices, rebate 

negotiations, and prescription drug benefits.7

 

4

42 U.S.C. § 1395w-114a(b); 77 Fed. Reg. 22072, 22173 (Apr. 12, 2012) (to be codified at 

42 C.F.R. § 2315). The Discount Program Agreement is signed between manufacturers 

and the Secretary of HHS. 

5

To identify the plan sponsors, we excluded plans with restricted enrollment, including 

employer-sponsored, Demonstration, and Programs of All-Inclusive Care for the Elderly.

6

To identify the top 10 manufacturers, we excluded brand-name drug expenditures for 

beneficiaries enrolled in plans with restricted enrollment, including employer-sponsored, 

Demonstration, and Programs of All-Inclusive Care for the Elderly.

7

Rebates are payments that manufacturers make to plan sponsors so that the sponsors 

encourage the use of certain drugs by their beneficiaries.
 

Page 4 GAO-12-914 Medicare Part D Discount Program

To describe how prices changed before and after implementation of the 

Discount Program for brand-name drugs used by beneficiaries who did 

and beneficiaries who did not reach the coverage gap in 2011, we 

analyzed the trend in Medicare Part D prices from January 2007 through 

December 2011 for two baskets of brand-name drugs used by non-LIS 

beneficiaries. The first basket of brand-name drugs included 77 highexpenditure brand-name drugs used by non-LIS beneficiaries while in the 

coverage gap in 2011 and the second basket included 78 highexpenditure brand-name drugs used by non-LIS beneficiaries who did not 

reach the coverage gap in 2011.8 We compared price trends for these 

two baskets because brand-name drugs used by non-LIS beneficiaries 

while in the coverage gap in 2011 may be more susceptible to price 

increases, since manufacturers must provide a 50 percent discount for 

these drugs, compared with drugs used by non-LIS beneficiaries who did 

not reach the gap and thus were not subject to the discount.9

Our findings are limited to those sponsors, PBMs, and manufacturers we 

spoke with and are not representative of the effects observed across all of 

these types of entities. Additionally, any price changes we observed may 

not be directly related to the Discount Program since multiple factors can 

affect drug prices over time. We reviewed data we received from CMS for 

For each of 

the drugs in the two baskets, we analyzed the median price, weighted by 

the utilization of each drug. The drug prices we analyzed were based on 

prices negotiated by plan sponsors and were affected by price changes 

made by manufacturers. We also conducted additional analyses of 

subsets of drugs of these baskets. For example, because a significant 

number of drugs overlapped both baskets (50 drugs), we compared price

trends for the brand-name drugs that did not overlap. (See app. I for a 

detailed discussion of our methodology for examining brand-name drug 

price changes and app. II for a listing of the brand-name drugs in each 

basket.)

 

8

For the first basket, we selected high-expenditure drugs that were used while non-LIS 

beneficiaries were in the coverage gap and did not include high-expenditure drugs used 

by these beneficiaries during the deductible and initial coverage periods, which are prior to 

the gap, or those during the catastrophic coverage period, which is after the gap. Drugs 

can be high expenditure based on their price and utilization.

9

While manufacturers did not know in advance specifically which individual beneficiaries 

would reach the coverage gap in 2011, there may have been an incentive to raise prices 

for brand-name drugs that were often used by beneficiaries who reached the coverage 

gap in prior years or by beneficiaries who were likely to have higher-than-average annual 

drug expenditures.
 

Page 5 GAO-12-914 Medicare Part D Discount Program

reasonableness and consistency, including screening for outliers. We 

also reviewed documentation and spoke with CMS officials about steps 

taken to ensure data reliability. Based on this review, we determined that 

the data used in this report were sufficiently reliable for our purposes. We 

conducted this performance audit from August 2011 through September 

2012 in accordance with generally accepted government auditing 

standards. Those standards require that we plan and perform the audit to 

obtain sufficient, appropriate evidence to provide a reasonable basis for 

our findings and conclusions based on our audit objectives. We believe 

that the evidence obtained provides a reasonable basis for our findings 

and conclusions based on our audit objectives.

Approximately 49 million elderly and disabled individuals were enrolled in 

Medicare in 2011, of which about 29 million were enrolled in Part D. 

Medicare beneficiaries obtain Part D coverage by choosing from multiple, 

competing plans offered by plan sponsors—often private insurers—that 

contract with CMS to offer the prescription drug benefit. About 63 percent 

of the approximately 29 million Part D beneficiaries were enrolled in 

stand-alone prescription drug plans (PDP), which add drug coverage to 

original fee-for-service Medicare and certain Medicare plans, and 

approximately 37 percent were enrolled in Medicare Advantage

prescription drug plans (MA-PDP), which provide Medicare benefits and 

prescription drug coverage through a single privately managed plan (see 

table 1 for the number of beneficiaries enrolled by plan type).10 Of the 

approximately 29 million beneficiaries enrolled in Medicare Part D, about 

36 percent were LIS beneficiaries and approximately 64 percent were 

non-LIS beneficiaries (see table 1 for the number of beneficiaries enrolled 

in PDPs and MA-PDPs who were LIS and non-LIS).

 

10PDPs and MA-PDPs are offered by insurance companies and other private companies.

Background 

Medicare Part D 

Enrollment and Spending
 

Page 6 GAO-12-914 Medicare Part D Discount Program

Table 1: Medicare Enrollment by Plan Type and Income Subsidy Status, 2011

Medicare enrollment Number in millions

Total Medicare enrollment 48.7

Total Medicare Part D enrollment 29.3

Stand-alone prescription drug plans (PDP) 18.6

Medicare Advantage prescription drug plans (MA-PDP) 10.7

Total Medicare Part D enrollment 29.3

Non-low-income subsidy (LIS) 18.8

LIS 10.5

Source: Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds and 

Medicare Payment Advisory Commission (MedPAC).

Note: Total Medicare enrollment for 2011 is from the Board of Trustees Report and Medicare Part D 

enrollment figures are from MedPAC’s analysis of April 2011 enrollment data. See Boards of 

Trustees, Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds, 

2012 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal 

Supplementary Medical Insurance Trust Funds (Washington, D.C.: Apr. 23, 2012) and Medicare 

Payment Advisory Commission, March 2012 Report to the Congress: Medicare Payment Policy

(Washington, D.C.: Mar. 15, 2012). 

In 2011, federal spending on Part D totaled approximately $67 billion, 

accounting for about 12 percent of total Medicare expenditures.11

Medicare Part D spending depends on several factors, including the 

number of beneficiaries, their health status and extent of drug utilization, 

and the cost of drugs covered by Part D. In its 2012 report to Congress, 

the Medicare Payment Advisory Commission (MedPAC) reported that 

prices for individual Part D drugs (brand-name and generics) rose by an 

average of 18 percent cumulatively between January 2006 and 

December 2009.12

 

11See Boards of Trustees, Federal Hospital Insurance and Federal Supplementary 

Medical Insurance Trust Funds, 2012 Annual Report of the Boards of Trustees of the 

Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds

(Washington, D.C.: Apr. 23, 2012).

To help keep Part D spending down, CMS relies on 

12MedPAC contracted with researchers at Acumen, LLC, to construct a series of volumeweighted price indexes for all drug and biologic prescriptions filled under Medicare Part D. 

The indexes do not reflect rebates from manufacturers, but do reflect discounts from 

pharmacies at the point-of-sale. MedPAC also reported that taking into account the 

substitution of generics for brand-name drugs, overall Part D prices rose 1 percent 

cumulatively between January 2006 and December 2009. Medicare Payment Advisory 

Commission, March 2012 Report to the Congress: Medicare Payment Policy (Washington, 

D.C.: Mar. 15, 2012). A generic drug is chemically equivalent to its branded counterpart 

and is generally marketed by multiple manufacturers under a nonproprietary name.
 

Page 7 GAO-12-914 Medicare Part D Discount Program

competing plan sponsors to negotiate drug prices for the beneficiaries in 

their plans.13 Medicare Part D plan sponsors may contract with PBMs to 

negotiate price discounts with retail pharmacies and rebates with drug 

manufacturers for the drugs a plan covers, or plan sponsors may 

independently negotiate directly with pharmacies and manufacturers.14

The price discounts that plan sponsors negotiate with pharmacies are 

based on drug prices that manufacturers establish and generally result in 

a lower price that a beneficiary pays at the point-of-sale. In comparison, 

the rebates that plan sponsors negotiate with drug manufacturers are 

passed on to plan sponsors who may use them to lower beneficiary costs 

including premiums.15

The Medicare Prescription Drug, Improvement, and Modernization Act of 

2003 (MMA), which established Medicare Part D, required that all Part D 

plan sponsors offer a minimum set of benefits to beneficiaries, defined as 

the standard Part D benefit.16 For non-LIS beneficiaries, this benefit 

features a deductible (a fixed dollar amount that beneficiaries must pay 

before coverage takes effect) and an initial coverage period during which 

the beneficiary pays a coinsurance (or percentage share of the drug’s 

actual costs) for prescription drugs until the beneficiary reaches the initial 

coverage limit. After the initial coverage period, the beneficiary enters the 

coverage gap, which is followed by the catastrophic coverage period in 

which he or she pays a small amount of the total drug costs.17

 

13Federal law prohibits the Secretary of HHS from interfering with price negotiations 

between plan sponsors and drug manufacturers and pharmacies. 42 U.S.C. § 1395w111(i).

14Plan sponsors may also contract with PBMs to help manage their prescription drug 

benefits, for example, by operating mail-order prescription services and administrative 

claims processing systems. A portion of the manufacturer’s rebate may be retained by the 

PBM or the plan sponsor.

15A premium is a periodic payment that a beneficiary must make to be enrolled in a Part D 

plan and receive prescription drug coverage. Beginning in 2011, PPACA required 

beneficiaries with higher incomes to pay an income-related premium, meaning that they 

must pay higher premiums than beneficiaries with lower incomes. 42 U.S.C. § 1395w113(a).

16Pub. L. No. 108-173, § 101, 117 Stat. 2066, 2071 (adding a new Part D to title XVIII of 

the Social Security Act) (codified at 42 U.S.C. §§ 1395w-101 et seq.).

17The standard parameters are adjusted each year based on the percentage increase in 

average per capita total Part D drug expenditures for beneficiaries. 

Medicare Part D Benefit 

and Plan Design
 

Page 8 GAO-12-914 Medicare Part D Discount Program

Beneficiaries must also pay a monthly premium to be enrolled in a Part D 

plan. LIS beneficiaries do not pay the same out-of-pocket costs as nonLIS beneficiaries since they receive subsidies to assist them with their 

out-of-pocket drug costs.

In 2011, out-of-pocket costs for non-LIS beneficiaries in defined standard 

benefit plans in the initial coverage period included a $310 deductible and 

25 percent coinsurance (with the plan paying the remaining 75 percent) 

until the total combined drug costs paid by the beneficiary and the Part D 

Plan reached the initial coverage limit of $2,840.18

MMA also allows plan sponsors to offer plans that are either actuarially 

equivalent to or exceed the defined standard benefit. These benefit plans 

can vary in design with regards to the monthly premiums, initial coverage 

limit, and cost-sharing arrangements such as copayments and 

coinsurance, but include the elements of the defined standard benefit. For 

example, plans with enhanced drug benefits may charge higher monthly 

premiums than defined standard benefit plans, but may offer a reduced or 

no deductible, charge a lower coinsurance amount than the 25 percent 

coinsurance during the initial coverage period, and provide some 

coverage for drugs when beneficiaries reach the coverage gap. Most 

Part D beneficiaries are enrolled in these actuarially equivalent or 

enhanced benefit plans.

The beneficiary then 

entered the coverage gap until total drug costs reached the 2011 

catastrophic coverage threshold of $6,447.50. Once this threshold was 

reached, the beneficiary paid the greater of either a $2.50 to $6.30 

copayment or 5 percent coinsurance per prescription during the 

catastrophic period. Prior to 2011, non-LIS beneficiaries in the defined 

standard benefit plan were responsible for 100 percent of their drug costs 

while in the coverage gap.

19

 

18During the initial coverage period up until $2,840, the beneficiary paid a total of $942.50 

in out-of-pocket costs ($310 for the deductible plus $632.50, which represents 25 percent 

coinsurance) while the plan paid $1897.50 (or 75 percent coinsurance). 

Each plan also has a formulary (a list of the 

prescription drugs that it covers) and plan sponsors select the 

coinsurance or copay amount that beneficiaries must pay for each listed 

19In 2011, over 90 percent of beneficiaries in PDPs and MA-PDPs were enrolled in 

actuarially equivalent or enhanced plans. Most of these beneficiaries, however, do not 

have coverage for brand-name drugs in the coverage gap. See Medicare Payment 

Advisory Commission, March 2012 Report to the Congress: Medicare Payment Policy. 
 

Page 9 GAO-12-914 Medicare Part D Discount Program

drug.20 Plan sponsors may require beneficiaries to pay a higher 

coinsurance or co-pay amount, for example, for certain high-cost drugs, 

such as specialty-tier eligible drugs that treat conditions such as cancer, 

multiple sclerosis, and rheumatoid arthritis.21 Plan sponsors also select 

whether any utilization management practices apply for each listed drug, 

such as limits on the amount of drug that can be provided.22

The Discount Program began in January 2011 after being established in 

2010 by PPACA to reduce beneficiaries’ out-of-pocket drug costs when 

they reach the coverage gap. Non-LIS beneficiaries are eligible for the 

discount if they are enrolled in a PDP or MA-PDP, are not enrolled in a 

qualified retiree prescription drug plan, and have reached or exceeded 

the initial coverage limit during the year.23

 

20Sponsors must adhere to a minimum set of formulary requirements established in 

statute and regulation. Sponsors generally must include at least two drugs within each 

therapeutic category and class of covered Part D drugs. Exceptions are allowed, for 

example when there is only one drug in a particular category or class. In addition, CMS 

requires that formularies include “all or substantially all” drugs within six designated 

categories of clinical concern. See 42 U.S.C. § 1395w-104(b)(3)(C)(i); 42 C.F.R. 

§ 423.120(b)(2)(2011); CMS, Medicare Prescription Drug Benefit Manual, Chapter 6, 

§ 30.2.5 (2010).

Beneficiaries that are enrolled 

in enhanced plans providing some coverage for brand-name drugs when 

they reach the coverage gap may also receive the discount after 

21CMS allows plans to establish a specialty tier for high-cost drugs when their monthly 

cost exceeds a certain threshold, and in 2011 CMS established a threshold of $600. 

Standard benefit plans may not charge a coinsurance amount greater than 25 percent for 

such drugs. 42 C.F.R. § 423.578(a)(7)(2011); CMS, Medicare Prescription Drug Benefit 

Manual, Chapter 6, § 30.2.4 (2010).

22These utilization management practices can include (1) step therapy, which requires 

that a beneficiary try lower-cost drugs before a sponsor will cover a more costly drug; 

(2) prior authorization, which requires a beneficiary to obtain the sponsor’s approval 

before a drug is covered for that individual; and (3) quantity limits, which restrict the 

dosage or number of units of a drug provided within a certain period of time. Utilization 

management practices are subject to CMS approval.

23To be eligible for the Discount Program, beneficiaries must not have not incurred costs 

for covered Part D drugs in the year equal to the annual out-of-pocket threshold. 

Beneficiaries with such incurred costs would be eligible for catastrophic coverage. 

42 U.S.C. § 1395w-114a(g)(1).

Medicare Part D Coverage 

Gap Discount Program
 

Page 10 GAO-12-914 Medicare Part D Discount Program

supplemental benefits are applied.24 PPACA required that manufacturers 

wishing to have their brand-name drugs covered under the Medicare 

Part D program participate in the Discount Program. To participate in the 

Discount Program, manufacturers must sign an agreement with CMS to 

provide non-LIS beneficiaries a 50 percent discount on the plannegotiated price for brand-name drugs at the point-of-sale when non-LIS 

beneficiaries reach the coverage gap.25 In addition, PPACA stipulated 

that both the portion of drug costs for brand-name drugs paid by the 

beneficiary and the portion paid by the manufacturer count toward 

reaching the beneficiary’s annual catastrophic coverage threshold.26

Separately, PPACA also included provisions that phase out the coverage 

gap gradually through 2020 by providing Medicare subsidies to help pay 

for the cost of brand and generic prescription drugs in the gap for non-LIS 

beneficiaries.

As a 

result, beneficiaries’ out-of-pocket costs will be significantly reduced. (See 

app. III for information about how the Discount Program works for 

beneficiaries at the point-of-sale for brand-name drugs.)

27 Specifically, beginning in 2013, Medicare will pay 

2.5 percent of the plan-negotiated price for brand-name drugs.28

 

24For beneficiaries enrolled in enhanced benefit plans that have brand-name drug 

coverage while in the coverage gap, the 50 percent discount is applied to the amount the 

beneficiary owes, according to their supplemental coverage. 42 U.S.C. § 1395w114a(c)(2). For example, a beneficiary with a $30 copayment for brand-name drugs while 

in the coverage gap pays $15 and the manufacturer pays $15, after applying the 50 

percent discount to the copayment.

Medicare 

will increase its subsidy to 25 percent for brand-name drugs by 2020, 

while manufacturers will continue to pay the 50 percent discount through 

2020 and in subsequent years for a combined 75 percent payment 

towards brand-name drugs for beneficiaries. Additionally, beginning in 

January 2011, Medicare paid 7 percent of the plan-negotiated price for 

generic drugs while the beneficiary paid 93 percent of the cost when they 

2542 U.S.C. § 1395w-114a(a). In 2011, over 99 percent of brand-name drug 

manufacturers participated in the Discount Program, according to CMS officials. The 

discount is only applicable for brand-name drugs and those covered under Part D. 

42 U.S.C. § 1395w-114a(g)(2). 

2642 U.S.C. § 1395w-102(b)(4)(E). 

27PPACA, § 3301 (amending Part D of title XVIII) (codified at 42 U.S.C. §§ 1395w-101 et 

seq.).

2842 U.S.C. § 1395w-102(b)(2)(D). 
 

Page 11 GAO-12-914 Medicare Part D Discount Program

reached the coverage gap.29 Medicare will increase its subsidy to 

75 percent for generic drugs by 2020.30 CMS encourages beneficiaries to 

use generic drugs to reduce their out-of-pocket spending for drugs, which 

also helps keep Medicare Part D spending down. In 2010, about 

75 percent of drugs dispensed in Medicare Part D were generic, 

according to CMS.31 The coverage gap will be eliminated by 2020 as the 

beneficiary’s coinsurance for brand-name and generic drugs will be 

reduced to 25 percent—the same coinsurance amount as required during 

the initial coverage period. See table 2 for beneficiary coinsurance and 

Medicare subsidy amounts for brand-name and generic drugs through 

2020.

 

2942 U.S.C. § 1395w-102(b)(2)(C). 

30For brand-name drugs, all applicable discounts paid by manufacturers count toward 

reaching the beneficiary’s annual catastrophic coverage threshold limit. See 42 U.S.C. 

§ 1395w-102(b)(4)(E). Since no such payments are made on behalf of beneficiaries in 

relation to generic drugs, only the amount the beneficiary pays for a generic drug counts 

toward reaching the threshold limit.

31The substitution of generic drugs for brand-name drugs has contributed to the slowerthan-expected growth in Medicare Part D spending between 2006 and 2011. See Kaiser 

Family Foundation, Medicare Part D Spending Trends: Understanding Key Drivers and 

the Role of Competition (Washington, D.C.: May 2012).
 

Page 12 GAO-12-914 Medicare Part D Discount Program

Table 2: Coinsurance Paid by Non-LIS beneficiaries While in the Coverage Gap for 

Brand-Name and Generic Drugs, 2011 to 2020

Percent

Brand-name drugs Generic drugs

Calendar 

year

Beneficiary 

coinsurance

Medicare 

subsidy

Manufacturer 

discount

Beneficiary 

coinsurance

Medicare 

subsidy

2011 50% 0% 50% 93% 7%

2012 50 0 50 86 14

2013 47.5 2.5 50 79 21

2014 47.5 2.5 50 72 28

2015 45 5 50 65 35

2016 45 5 50 58 42

2017 40 10 50 51 49

2018 35 15 50 44 56

2019 30 20 50 37 63

2020 25 25 50 25 75

Source: CMS.

Figure 1 shows a comparison of a non-LIS beneficiary’s out-of-pocket 

spending for prescription drugs when the beneficiary reaches the 

coverage gap under the standard benefit plan without and with 

implementation of the Discount Program in 2011. If the Discount Program 

was not in place, non-LIS beneficiaries in the standard benefit would have 

been responsible for $3,607.50 in drug costs during the coverage gap in 

2011 ($6,447.50 annual catastrophic threshold - $2,840 initial coverage 

limit = $3,607.50). With the Discount Program, non-LIS beneficiaries 

would pay $1,803.75 in drug costs when using only brand-name drugs 

during the coverage gap.
 

Page 13 GAO-12-914 Medicare Part D Discount Program

Figure 1: Comparison of a Non-LIS Beneficiary’s Out-of-Pocket Spending for Prescription Drugs in the Coverage Gap under 

the Standard Benefit in 2011, without and with the Medicare Coverage Gap Discount Program in Place

Note: Once the catastrophic threshold is reached, the beneficiary pays the greater of 5 percent 

coinsurance or copayments of $2.50 for generics or preferred multiple-source drugs and $6.30 for 

other drugs, including brand-name drugs. A multiple-source drug is one for which there is at least one 

other drug product rated as therapeutically and pharmaceutically equivalent. Therapeutically and 

pharmaceutically equivalent drugs have the same active ingredients and clinical effects. A preferred 

drug is a drug that is included on a plan’s formulary for which beneficiary cost-sharing is lower 

(i.e., the drug has a preferred position), compared to a nonpreferred drug.

a

This side of the figure is an example of what beneficiary out-of-pocket spending for prescription 

drugs would have been in 2011 if the Coverage Gap Discount Program had not been implemented.

Plan sponsors, drug manufacturers, and CMS each have responsibilities 

for carrying out the Discount Program. Plan sponsors are responsible for 

making payments at the point-of-sale for the 50 percent discount for 

brand-name drugs on behalf of manufacturers, providing information to 

pharmacies about beneficiaries and the drugs subject to the discount, and 

reporting discount amounts to CMS. In order for the discount to be 

provided at the point-of-sale to beneficiaries, plan sponsors determine: 

(1) that the drug is an applicable drug; (2) that the beneficiary is eligible 

for the discount; (3) that the pharmacy claim for the drug is wholly or 

partially in the coverage gap; and (4) the amount of the discount. After the 

Discount Program 

Responsibilities for Plan 

Sponsors, Drug 

Manufacturers, and CMS
 

Page 14 GAO-12-914 Medicare Part D Discount Program

beneficiary receives the discount at the point-of-sale, plan sponsors are 

responsible for recording the amount of the discount that was paid for the 

drug, along with information such as the associated sales tax and 

dispensing fee.32

Drug manufacturers are responsible for making payments to plan 

sponsors for the discounts sponsors provide on applicable drugs and 

maintaining up-to-date listings of drugs that are subject to the discount, as 

stated in the Discount Program Agreement. Manufacturers are required to 

reimburse plan sponsors for the discounts for applicable drugs that plan 

sponsors paid on their behalf at the point-of-sale. Manufacturers are also 

responsible for electronically listing and maintaining an up-to-date 

electronic Food and Drug Administration (FDA) registration and listing of 

all national drug codes (NDC) so that CMS and plan sponsors can 

accurately identify applicable drugs in the Discount Program.

The plan sponsors include this information on the PDE 

record, a summary record for each prescription that a beneficiary fills. 

Plan sponsors must submit PDE records to CMS.

33

CMS is responsible for making prospective payments to plan sponsors, 

invoicing manufacturers, and overseeing the Discount Program, as stated 

in the Discount Program Agreement. CMS makes monthly Part D 

prospective payments to plan sponsors for providing prescription drug 

benefits to Medicare beneficiaries, which includes payments for providing 

discounts to beneficiaries. The prospective payments are calculated with 

information such as the number of beneficiaries enrolled in a plan and 

their projected drug costs. CMS is also responsible for aggregating and 

validating the discount amounts that plan sponsors have paid, as reported 

on the PDE records. Upon aggregating the amount of the discounts that 

plan sponsors have paid, CMS sends this information to its third-party 

administrator (TPA), which is responsible for invoicing the manufacturers 

on a quarterly basis. CMS also monitors plan sponsors’, manufacturers’, 

and the TPA’s compliance with their program responsibilities.

 

32A dispensing fee is the amount paid to the pharmacy for dispensing a medication. 

33An NDC is an identifying prescription drug product number that is registered and listed 

with the FDA. See http://www.fda.gov/Drugs/InformationOnDrugs/ucm142438.htm for the 

FDA’s listing of NDCs (accessed July 3, 2012).
 

Page 15 GAO-12-914 Medicare Part D Discount Program

CMS oversees the provision of discounts by plan sponsors to eligible 

beneficiaries who reach the coverage gap, and ensures that the discounts 

are paid for by drug manufacturers. CMS oversight activities include 

performing checks of prescription drug data to verify that plan sponsors 

provide accurate discounts at the point-of-sale to eligible beneficiaries 

who reach the coverage gap. CMS also tracks the payment of discounts 

by drug manufacturers to plan sponsors and has implemented a dispute 

resolution process to resolve manufacturer disputes about discounts. In 

addition, CMS performs other activities, such as monitoring beneficiary 

complaints, and has reported on certain Discount Program outcomes.

CMS performs 15 automated checks of PDE data specific to the Discount 

Program that verify whether plan sponsors have provided and accurately 

calculated discounts at the point-of-sale to eligible beneficiaries who 

reach the coverage gap.34 The PDE data checks include verifying that 

plan sponsors have provided discounts to beneficiaries who are eligible 

for a discount; for example, by checking beneficiaries’ LIS status and their 

accumulated drug costs to confirm that they have reached the coverage 

gap within the benefit year. The PDE data checks also verify whether plan 

sponsors have accurately calculated discounts for beneficiaries. For 

example, CMS calculates an expected discount amount based on the 

brand-name drug price that is recorded on the PDE, and compares it with 

the discount amount that the plan sponsor records on the PDE. CMS 

provides plan sponsors with detailed information about any errors the 

agency identifies through the PDE data checks. Plan sponsors are 

responsible for correcting these errors and resubmitting the PDE records 

to CMS.35

 

34CMS officials told us that the 15 PDE checks are included among the 150 PDE checks 

that CMS conducts for the Medicare Part D program.

CMS officials told us that an additional use of the PDE data 

checks is to prevent fraud in the Discount Program, since CMS uses PDE 

data to determine the final payment amounts owed to plan sponsors by 

comparing actual costs to the prospective payments that CMS makes to 

plan sponsors, which includes payment for the discounts plan sponsors 

provide to beneficiaries at the point-of-sale. CMS officials also told us 

they also review the validity of plan sponsors’ PDE records for discounts 

as part of CMS’s annual onsite audits of plan sponsors.

35According to CMS, plan sponsors are able to resolve most errors and may contact CMS 

for assistance as needed. 

CMS Oversees 

Coverage Gap 

Discounts Provided 

by Plan Sponsors and 

Paid for by 

Manufacturers 

CMS Checks Prescription 

Drug Data to Verify That 

Plan Sponsors Provide 

Accurate Discounts to 

Eligible Beneficiaries
 

Page 16 GAO-12-914 Medicare Part D Discount Program

CMS periodically provides guidance to plan sponsors about reporting 

Discount Program information on the PDE record and the agency’s 15 

PDE data checks. For example, in April 2010, CMS issued guidance to 

plan sponsors on the requirements and procedures for implementing the 

Discount Program, including how to calculate discounts for eligible 

beneficiaries enrolled in the defined standard benefit plan and how to 

record discount information using the PDE data fields that are specific to 

the Discount Program.36 Since the Discount Program was implemented in 

January 2011, CMS has issued further guidance to plan sponsors 

regarding the 15 PDE data checks. For example, in September 2011, 

CMS issued a memo to plan sponsors that explained how CMS plans to 

conduct PDE data checks that verify the status of brand-name drugs that 

received discounts using the FDA’s updated NDC directory, which 

identifies brand-name drugs.37

CMS tracks the payment of discounts by drug manufacturers to plan 

sponsors and can impose penalties for failure to pay. CMS officials 

reported that they track manufacturers’ payments to plan sponsors for 

discounts by reviewing confirmation reports that plan sponsors submit to 

the agency when they receive payments from manufacturers. 

Manufacturers receive quarterly invoices from the TPA of discount 

payments owed to plan sponsors based on aggregated PDE data.38

Manufacturers pay plan sponsors directly and plan sponsors submit a 

confirmation report to CMS upon the receipt of these payments. To 

ensure manufacturers make payments to plan sponsors for discounts, 

CMS may impose civil monetary penalties on drug manufacturers that fail 

to pay plan sponsors for the discounts.39

 

36CMS, Prescription Drug Event (PDE) Record Changes Required to Close the Coverage 

Gap (Baltimore, Md.: Apr. 30, 2010).

CMS officials told us a few 

37CMS, Update on Part D National Drug Code Edits (Baltimore, Md.: Sept.12, 2011).

38Three of the eight manufacturers we interviewed told us that they experienced problems 

with handling the quarterly invoices because the data files were provided in an outdated 

format, which required additional resources to program and interpret the invoice data. The 

TPA has other responsibilities related to the invoicing of manufacturers, including notifying 

manufacturers of invoice errors and making adjustments as needed to quarterly invoices. 

CMS officials told us they frequently monitor the TPA’s performance via phone, e-mail, 

and meetings. CMS also plans to conduct its first audit and onsite visit of the TPA in 2012.

39CMS requires manufacturers to pay all applicable discounts to plan sponsors within 

38 days of receipt of the quarterly invoices.

CMS Tracks Discount 

Payments by 

Manufacturers and Has a 

Process to Resolve 

Payment Disputes
 

Page 17 GAO-12-914 Medicare Part D Discount Program

manufacturers have been late in submitting payments to plan sponsors 

due to technical issues, and that one manufacturer did not submit 

payment because the company went bankrupt.40

CMS has implemented a dispute resolution process that allows 

manufacturers to dispute discounts they have paid to plan sponsors if 

they find problems with the quarterly invoices. Manufacturers can submit 

a dispute within 60 days of receipt of the quarterly invoices to the TPA, 

which is responsible for determining if the dispute is valid and makes 

adjustments to manufacturers’ invoices as necessary. Manufacturers 

have the right to appeal the TPA’s determination through an independent 

review entity established by CMS.

CMS officials said they 

have not imposed any penalties on manufacturers as of July 2012.

41 If the manufacturer disagrees with 

the independent review entity’s determination, it may request the review 

of CMS, with CMS having the final decision on the dispute determination. 

In March 2012, CMS issued guidance providing manufacturers with 

detailed information about the basis for submitting disputes and CMS’s 

process for evaluating dispute submissions.42 For example, CMS 

explained that manufacturers may submit a dispute for a discount amount 

included in an invoice because they believe it is too high, and such 

disputes would be evaluated by analyzing the drug’s price relative to all 

other PDE records for the same drug. If it is determined that the price falls 

within an acceptable range, the dispute would be denied.

 

40CMS officials told us the agency has not determined what entity would be financially 

liable for making quarterly invoice payments if the company that went bankrupt does not 

pay these invoices.

41In October 2011, CMS issued updated guidance on the dispute resolution process that 

expanded the time frames for manufacturers to appeal the TPA’s determinations to the 

independent review entity from 60 days to 90 days. See CMS, Medicare Coverage Gap 

Discount Program – Updated Guidance (Baltimore, Md.: Oct. 28, 2011).

42CMS, Medicare Coverage Gap Discount Program – Dispute Resolution (Baltimore, Md.: 

Mar. 5, 2012). Prior to CMS’s issuance of the March 2012 guidance, three of the eight 

manufacturers we interviewed told us that they wanted more guidance from CMS 

regarding the dispute resolution process, including more information on how to submit 

disputes of discount payments to the TPA. 
 

Page 18 GAO-12-914 Medicare Part D Discount Program

CMS performs other oversight activities of the Discount Program that 

include maintaining codes, identifying drugs covered under the program, 

monitoring beneficiary complaints, and conducting audits of 

manufacturers:

• The agency maintains a list of codes (called labeler codes) identifying 

drugs covered under the Discount Program, which it makes publicly 

available on the CMS website.43 CMS checks that manufacturers that 

participate in the Discount Program are providing discounts on brandname drugs associated with this list of labeler codes.

• CMS officials told us they monitor and resolve beneficiary 

complaints—expressions of dissatisfaction about the Medicare 

program, including concerns about providers and health plans—

related to the Discount Program through their Part D Complaints 

Tracking Module. Beneficiaries submit the complaints, for example, by 

calling the 1-800-MEDICARE toll-free number or submitting an online 

Medicare complaint form. CMS officials said that, as of June 30, 2012, 

they have received and resolved 147 beneficiary complaints about the 

Discount Program, including complaints from beneficiaries who 

reported they reached the coverage gap and did not receive 

discounts, who received incorrect discounts, or who had concerns 

about how the discount was calculated.

• CMS may periodically audit drug manufacturers regarding information 

about the Discount Program that they are required to submit to the 

agency, including NDC expiration dates and labeler codes. 

Manufacturers rely on this information when they submit disputes of 

discounts from the quarterly invoices. CMS officials told us they have 

not conducted any of these audits as of July 2012.

CMS also ensures that information that may identify beneficiaries is not 

disclosed in any capacity under the Discount Program, as stated in the 

Discount Program Agreement. In order to protect beneficiary information, 

CMS initially decided not to invoice manufacturers for low-volume 

claims—claims for a specific drug submitted by 10 or fewer beneficiaries 

at the same pharmacy—because they were concerned that certain 

 

43Labeler codes are the first five digits of the NDC and identify the company that 

manufacturers a drug. Manufacturers submit this information to CMS to indicate what 

drugs are covered under the Discount Program.

CMS Performs Other 

Oversight Activities and 

Reports on Certain 

Discount Program 

Outcomes
 

Page 19 GAO-12-914 Medicare Part D Discount Program

information from these claims, such as the identity of the pharmacy, may 

be used to identify beneficiaries.44 After further evaluation of the policy, 

CMS issued guidance in January 2012 stating that the agency would 

invoice manufacturers for low-volume claims; CMS officials told us they 

had determined that beneficiary information could not be identified from 

such invoices.45

In addition, CMS has stated that the agency conducts other monitoring 

activities of the Discount Program, which include reporting on certain 

outcomes of the program and monitoring Medicare Part D drug prices. 

For example, CMS reported that over 3.7 million beneficiaries who 

reached the coverage gap received discounts, with an average of $613 in 

discounts per beneficiary in 2011.46 CMS officials told us they also 

monitor Medicare Part D brand-name drug prices annually.47 CMS will 

continue its process of monitoring drug prices, using data from 2011, 

which will take into account any effects on prices from the Discount 

Program and other factors.48 CMS officials further explained that because 

many factors, including time, can affect changes in drug prices, the 

agency may not be able to separate out such effects on prices from the 

time the Discount Program was introduced.

 

44Five of the eight manufacturers we interviewed reported that their financial reporting was 

impacted by not being invoiced for low-volume claims. Three of the seven plan sponsors 

we interviewed also expressed concerns about not receiving payment from manufacturers 

for low-volume claims.

45See CMS, Medicare Coverage Gap Discount Program – Update on Low-Volume Claims

(Baltimore, Md.: Jan. 27, 2012). CMS officials told us that manufacturers have been 

invoiced for all outstanding low-volume claims as of March 2012.

46See CMS website, “Plan Payment, Coverage Gap Discount Program, Coverage Gap 

Discount Data Spreadsheets,” https://www.cms.gov/Medicare/Medicare-Advantage/PlanPayment/CGDP.html (accessed Aug. 1, 2012). 

47For example, CMS has analyzed changes in drug prices that are reported by plan 

sponsors on the Medicare Prescription Drug Plan Finder, an online tool that allows 

beneficiaries to compare plan and drug cost information for Medicare Part D plans.

48CMS officials stated that they plan to conduct this analysis after CMS reconciles the 

differences between its prospective payments and actual expenditures for 2011.
 

Page 20 GAO-12-914 Medicare Part D Discount Program

Plan sponsors, PBMs, and drug manufacturers we spoke with had 

different perspectives on aspects of the drug pricing and plan design 

effects of the Discount Program, which include drug prices, rebates, 

formularies, plan benefit design, and utilization management practices.

Most plan sponsors and PBMs told us they believe the Discount Program 

may have been a factor in the rising prices of some brand-name drugs, 

while most manufacturers told us the Discount Program has not affected 

the prices of brand-name drugs they negotiate with sponsors and PBMs. 

The three PBMs we interviewed also told us they observed that some 

manufacturers decreased the amount of rebates for the brand-name 

drugs they offered, which they believe occurred as a result of the 

Discount Program. In comparison, most of the plan sponsors did not 

observe manufacturers decrease rebate amounts and most 

manufacturers reported no effects on their rebate negotiations as a result 

of the Discount Program. Most plan sponsors and PBMs also reported 

that the Discount Program did not affect their Part D plan formularies, 

plan benefit design, or utilization management practices.

Six of the seven plan sponsors and two of the three PBMs we interviewed 

told us they believe the Discount Program may have been a contributing 

factor in the rising prices of brand-name drugs by some manufacturers.49

Some sponsors and one PBM told us they believe that some 

manufacturers raised prices for their brand-name drugs to recoup the 

costs of the discounts that they anticipated paying. Some of these 

sponsors and one PBM based their observations on reviews of drug 

pricing data; for example, one plan sponsor told us it reviewed PDE data. 

Two of these plan sponsors and one PBM also told us they observed 

such price increases occurring as early as 2010—when the Discount 

Program was announced—and continuing through 2012. For example, 

one plan sponsor and one PBM told us that they attributed the Discount 

Program as a factor in rising brand-name drug prices they observed from 

2010 to 2011 based on analyses of their own drug pricing data.

 

49The remaining plan sponsor we interviewed told us it did not observe changes to brandname drug prices that it believes occurred as a result of the Discount Program. The 

remaining PBM told us while it has observed rising brand-name drug prices, the PBM 

cannot attribute the Discount Program as a factor.

Plan Sponsors, PBMs, 

and Manufacturers 

Had Different 

Perspectives on 

Aspects of the Drug 

Pricing and Plan 

Design Effects of the 

Discount Program

Most Plan Sponsors and 

PBMs Believe the Discount 

Program May Have Been a 

Factor in Rising Drug 

Prices, While Most 

Manufacturers Said It Has 

Not
 

Page 21 GAO-12-914 Medicare Part D Discount Program

Six of the eight manufacturers we interviewed, in comparison, believe that 

the prices of their brand-name drugs negotiated with plan sponsors and 

PBMs have not been affected by the Discount Program. One of the two 

remaining manufacturers said that it considered the Discount Program as 

a factor when negotiating drug prices, but other factors, such as whether 

a given drug has competitors in the market, had more influence over 

negotiations. The other remaining manufacturer told us it was still 

evaluating the impact of the Discount Program and therefore could not 

determine whether it will affect or has affected brand-name drug prices.

The three PBMs we interviewed told us they observed that some drug 

manufacturers decreased the amount of rebates they offered for brandname drugs, which they believe occurred as a result of the Discount 

Program.50

Four of the seven plan sponsors we interviewed told us they did not 

observe decreased rebates as a result of the Discount Program. Three of 

these four plan sponsors told us that, while they did not observe 

decreased rebates, they believe manufacturers may likely decrease the 

amount of rebates they offer in the future and, according to two plan 

sponsors, they expect the decreases to be a result of manufacturers 

trying to recoup the costs of the discounts manufacturers are paying for 

some drugs. The remaining one of these four plan sponsors told us it has 

not observed any changes to rebate amounts because it has worked with 

manufacturers to maintain the same rebate levels offered prior to the 

Discount Program. In comparison, two plan sponsors told us they did 

observe some manufacturers decrease the amount of rebates they offer, 

and one of these plan sponsors told us it believes this occurred as a 

result of the Discount Program. The remaining seventh plan sponsor we 

spoke with did not specifically address the Discount Program’s effect on 

decreased rebate amounts.

One PBM observed that this was occurring among some 

manufacturers of specialty-tier-eligible drugs. Another PBM also told us it

observed these effects beginning as early as 2010, prior to the 

implementation of the Discount Program in 2011.

 

50The PBMs were speaking about the rebates they typically negotiate on behalf of the 

plan sponsors they represent. Manufacturers provide rebate payments to plan sponsors to 

encourage the use of certain drugs, and rebates result in overall lower Medicare spending 

for prescription drugs. 

PBMs, Plan Sponsors, and 

Manufacturers Had 

Different Observations on 

the Effects on Rebates as a 

Result of the Discount 

Program
 

Page 22 GAO-12-914 Medicare Part D Discount Program

Six of the eight manufacturers we interviewed told us that the Discount 

Program did not change their rebate negotiations with plan sponsors and 

PBMs. However, two manufacturers told us that the Discount Program 

has changed some aspects of their rebate negotiations. For example, one 

of these two manufacturers told us it has established limits with plan 

sponsors regarding the rebate amounts it will pay to plan sponsors as a 

result of the discounts it has to pay for some drugs. The other 

manufacturer also told us that it has taken the Discount Program’s effect 

into account when entering into rebate negotiations because paying for 

the discounts affects its profitability.

Most plan sponsors and PBMs we interviewed reported that the Discount 

Program has not affected their Medicare Part D plan formularies, plan 

benefit designs, and drug utilization management practices.51 All seven 

plan sponsors and two of the three PBMs we interviewed told us that 

Part D plan formularies have not changed as a result of the Discount 

Program. In addition, most of these plan sponsors and PBMs told us that 

the placement of brand-name drugs on plan formularies, including 

specialty-tier eligible drugs, was not affected by the Discount Program.52

In comparison, one PBM told us that formulary placement changes have 

occurred more frequently as a result of some manufacturers decreasing 

the amount of rebates they offer for brand-name drugs. In particular, this

PBM has observed fewer brand-name drugs included on plan formularies 

as well as fewer brand-name drugs placed on formularies in preferred 

positions, which result in lower beneficiary cost-sharing for those drugs.53

 

51The PBMs were speaking about the formularies of the plan sponsors for which they 

conduct rebate negotiations.

In addition to plan formularies, the seven plan sponsors we spoke with 

told us that the Discount Program has not affected the plan benefit design 

or drug utilization management practices of their Part D plans. For 

example, one of these plan sponsors told us that the Discount Program 

52Two of these plan sponsors said they removed some brand-name drugs from 

formularies because the manufacturers who produced the drugs did not participate in the 

Discount Program.

53In order to encourage the use of certain drugs among beneficiaries, manufacturers may 

pay a formulary rebate to a plan for placing a certain drug in a preferred position on the 

plan’s formulary. In exchange for the rebate, the plan may charge a lower copayment to 

the beneficiary for the drug in the preferred position, compared to nonpreferred brandname drugs, resulting in a lower cost for the beneficiary.

Most Plan Sponsors and 

PBMs Reported That the 

Discount Program Did Not 

Affect Formularies, Plan 

Benefit Design, or 

Utilization Management 

Practices
 

Page 23 GAO-12-914 Medicare Part D Discount Program

has not been a factor in any plan benefit design changes and that it bases 

its plan benefit design on factors such as the ability to compete for 

Medicare Part D beneficiaries. 

We found that prices for brand-name drugs used by beneficiaries in the 

coverage gap increased similarly to those used by beneficiaries who did 

not reach the gap, before and after the Discount Program was 

implemented in January 2011.54 From January 2007 to December 2010, 

prior to the implementation of the Discount Program, the median price 

(weighted by the utilization of each drug) for the basket of 77 brand-name 

drugs used by beneficiaries in the coverage gap increased 36.2 percent 

(see fig. 2).55 When measured across the same period, the median price 

for the basket of 78 brand-name drugs used by beneficiaries who did not 

reach the coverage gap also increased at a similar rate of 35.2 percent.56

During the first year with the Discount Program (from December 2010 

through December 2011), the median prices for the two baskets 

increased equally at a rate of about 13 percent.57

 

54We examined whether high-expenditure brand-name drugs used by beneficiaries in the 

coverage gap may be more susceptible to price increases by drug manufacturers than 

those used by beneficiaries who did not reach the gap.

55The point-of-sale price we analyzed is affected by price changes made by the 

manufacturer and reflects discounts that Part D plans have negotiated with pharmacies 

but does not include certain price concessions such as drug manufacturer rebates. While 

manufacturer rebates lower overall spending for drugs, manufacturer rebates are 

generally not passed onto the beneficiary at the point-of-sale.

56The baskets of brand-name drugs represent those used by beneficiaries in the coverage 

gap in 2011 and those used by beneficiaries who did not reach the coverage gap in 2011. 

57The basket of drugs used by beneficiaries in the coverage gap included eight specialtytier-eligible drugs, which are high-cost drugs, while the basket of drugs used by 

beneficiaries who did not reach the coverage gap did not include specialty-tier-eligible 

drugs. During the first year with the Discount Program (from December 2010 through 

December 2011), the median price for the specialty-tier-eligible drugs increased at a 

slower rate (8.8 percent) than the non-specialty-tier-eligible drugs (13.4 percent) in the 

basket of drugs used by beneficiaries in the coverage gap. 

Prices Increased at a 

Similar Rate for 

Brand-Name Drugs 

Used by Beneficiaries 

in the Coverage Gap 

and by Those Who 

Did Not Reach the 

Gap 
 

Page 24 GAO-12-914 Medicare Part D Discount Program

Figure 2: Price Indexes for Brand-Name Drugs Used by Medicare Part D Beneficiaries in the Coverage Gap and by Those Who 

Did Not Reach the Gap in 2011

Note: The price indexes are for two baskets of high-expenditure brand-name drugs that were used by 

Medicare Part D beneficiaries who did not receive a low-income subsidy (LIS). Drugs can be high 

expenditure based on their price and utilization. The index values of 136.2 and 154.1 indicate 

increases of 36.2 and 54.1 percent in the median prices for the basket of brand-name drugs used by 

Medicare Part D beneficiaries in the coverage gap in 2011, from January 2007 to December 2010 

and from January 2007 to December 2011. The index values of 135.2 and 153.1 indicate increases of 

35.2 and 53.1 percent in the median price for the basket of brand-name drugs used by beneficiaries 

who did not reach the coverage gap in 2011, from January 2007 to December 2010 and from January 

2007 to December 2011.

The median prices for the two baskets of brand-name drugs also 

increased similarly on an annual basis, from 2007 to 2011, with the 

greatest increase in price for both baskets occurring the first year with the 

Discount Program from December 2010 through December 2011 (see 

fig. 3).58

 

58The change in median price for 2007 is calculated from January 2007 through 

December 2007. In later years, the annual change in median price is calculated from 

December through December.

For example, from December 2009 through December 2010 the 
 

Page 25 GAO-12-914 Medicare Part D Discount Program

median price for the basket of drugs used by beneficiaries in the 

coverage gap and for the basket of drugs used by beneficiaries who did 

not reach the coverage gap each increased 10.2 percent. The greatest 

annual percent increase for the two baskets of brand-name drugs 

occurred from December 2010 through December 2011, during which 

time the median price increased 13.1 percent for the basket of brandname drugs used by beneficiaries in the coverage gap and 13.2 percent 

for the basket of brand-name drugs used by beneficiaries who did not 

reach the coverage gap. In addition, the average annual rate of increase 

for the basket of brand-name drugs used by beneficiaries in the coverage 

gap was 9.2 percent over the entire period (January 2007 to December 

2011), compared with a 9.0 percent increase for the other basket of 

drugs.

Figure 3: Annual Percent Change in Price for Brand-Name Drugs Used by Medicare 

Part D Beneficiaries in the Coverage Gap and by Those Who Did Not Reach the Gap 

in 2011

Note: The percentage changes are for two baskets of high-expenditure brand-name drugs that were 

used by Medicare Part D beneficiaries who did not receive a low-income subsidy (LIS). Drugs can be 

high expenditure based on their price and utilization. The change in median price from January 2007 

through December 2007 is expressed as an annual percentage change.
 

Page 26 GAO-12-914 Medicare Part D Discount Program

We continued to find similar price increases for each basket of unique 

brand-name drugs during the first year with the Discount Program after 

removing the 50 drugs that overlapped both baskets. During the first year 

of the Discount Program, the median prices for the two baskets of unique 

drugs increased by over 12 percent: 12.3 percent for the 27 unique drugs 

used by beneficiaries in the coverage gap and 12.9 percent for the 28 

unique drugs used by beneficiaries who did not reach the coverage gap.

While many factors affect drug prices, such as the availability of 

competing drugs to treat the same condition and manufacturing and 

marketing costs, increasing brand-name drug prices can increase out-ofpocket spending for some beneficiaries in the coverage gap as well as 

increase overall Part D spending. Thus, continued monitoring of brandname drug prices and manufacturer rebates will be important as the 

Discount Program matures.

HHS reviewed a draft of this report and in its written comments noted that 

our finding on the perspectives of stakeholders (Medicare Part D plan 

sponsors, drug manufacturers, and PBMs) on the effects of the Discount 

Program is consistent with HHS’s expectations and experience. HHS 

commented that our finding on price changes before and after 

implementation of the Discount Program for brand-name drugs used by 

Medicare Part D beneficiaries who did and did not reach the coverage 

gap is also consistent with HHS’s expectations and experience. HHS 

further noted that our finding on brand-name drug price changes is similar 

to the results of CMS’s own analysis of drug price data, which used a 

different methodology. HHS commented that CMS will continue to monitor 

the Discount Program to ensure that discounts on brand-name drugs are

applied accurately and in a timely manner for Medicare Part D 

beneficiaries. In addition, HHS noted that CMS will continue to monitor 

Part D drug prices as well as the impact of drug prices on the Medicare 

Part D program. HHS’s comments are printed in appendix IV.

As agreed with your offices, unless you publicly announce the contents of 

this report earlier, we plan no further distribution until 30 days from the 

report date. At that time, we will send copies to the Secretary of Health 

and Human Services and interested congressional committees. In 

addition, the report will be available at no charge on the GAO website at 

http://www.gao.gov. 

Agency Comments 
 

Page 27 GAO-12-914 Medicare Part D Discount Program

If you or your staff have questions about this report, please contact 

John E. Dicken at (202) 512-7114 or DickenJ@gao.gov. Contact points 

for our Offices of Congressional Relations and Public Affairs may be 

found on the last page of this report. GAO staff members who made key 

contributions to this report are listed in appendix V.

John E. Dicken

Director, Health Care
Appendix I: Methodology for Examining BrandName Drug Price Trends

Page 28 GAO-12-914 Medicare Part D Discount Program

To describe how prices changed before and after implementation of the 

Medicare Coverage Gap Discount Program (Discount Program) for 

brand-name drugs, we compared the trend of Medicare Part D prices 

from January 2007 to December 2011 for a basket of brand-name drugs 

used by beneficiaries in the coverage gap with a basket of brand-name 

drugs used by beneficiaries who did not reach the gap in 2011. We 

compared price trends for these two baskets because brand-name drugs 

used by beneficiaries in the coverage gap in 2011—the year the Discount 

Program began—may be more susceptible to price increases, since 

manufacturers must provide a 50 percent discount for these drugs 

compared with drugs used by beneficiaries that do not reach the gap and 

thus are not subject to the discount.1 We limited our analyses of Medicare 

Part D prices to those brand-name drugs that had high expenditures—

based on price and utilization—used by beneficiaries who did not receive 

a low-income subsidy (LIS) and who were enrolled in stand-alone 

prescription drug plans (PDP) and Medicare Advantage prescription drug 

plans (MA-PDP).2

We created two fixed baskets of high-expenditure brand-name drugs 

using prescription drug event (PDE) data obtained from the Centers for 

Medicare & Medicaid Services (CMS) to analyze the trend of Medicare 

Part D prices. We began by selecting: (1) the top 100 brand-name drugs, 

based on total expenditures, used by non-LIS beneficiaries in PDPs and 

MA-PDPs in the coverage gap in 2011 and (2) the top 100 brand-name 

drugs, based on total expenditures, used by non-LIS beneficiaries in 

 

1

While manufacturers did not know in advance specifically which individual beneficiaries 

would reach the coverage gap in 2011, there may have been an incentive to raise prices 

for brand-name drugs that were often used by beneficiaries who reached the coverage 

gap in prior years or by beneficiaries who were likely to have higher-than-average annual 

drug expenditures.

2

We excluded LIS beneficiaries because they are not eligible for the Discount Program. 

To focus on plans available to eligible beneficiaries, we excluded plans with restricted 

enrollment, including employer-sponsored, Demonstration, and Programs of All-Inclusive 

Care for the Elderly. We used CMS’s monthly enrollment plan files, which are publicly 

available, to identify plans with restricted enrollment. 

Appendix I: Methodology for Examining 

Brand-Name Drug Price Trends
Appendix I: Methodology for Examining BrandName Drug Price Trends

Page 29 GAO-12-914 Medicare Part D Discount Program

PDPs and MA-PDPs who did not reach the coverage gap in 2011.3 We 

identified the top 100 brand-name drugs for each basket by using the 

nine-digit national drug code (NDC-9).4 We determined the brand-name 

status of each NDC-9 by using FDA’s NDC directory, which CMS uses to 

identify whether a drug is a brand-name drug and therefore eligible for a 

50 percent discount under the Discount Program.5 We determined total 

expenditures for each NDC-9 by aggregating the amount paid at the 

point-of-sale for all PDE records corresponding to a given NDC-9.6 The 

amount paid at the point-of-sale included the ingredient cost (the drug’s 

price negotiated by the beneficiary’s Part D plan), sales tax, dispensing 

fee, and vaccination fee, if applicable.7

 

3

The 2011 PDE data included PDE records submitted to CMS through February 16, 2012, 

and did not include all PDE records for 2011 because CMS may accept PDE records for 

up to 24 months following the end of the calendar year. CMS officials told us that in the 

past they have observed that about 10 to 15 percent of the PDE records were submitted 

after the calendar year. CMS officials further noted that these additional PDE records are 

often for adjustments for previously submitted claims rather than for new claims. We 

included PDE records for claims in the coverage gap period that straddled other periods, 

such as the catastrophic coverage period, because the 50 percent discount applies to the 

portion of the drug price that falls in the coverage gap.

After identifying the top 100 highexpenditure brand-name drugs by NDC-9 in each basket, we excluded 

those NDC-9s that did not have at least 25 PDE records in each month of 

4

NDCs are the universal product identifiers for drugs for human use. The Food and Drug 

Administration (FDA) assigns the first segment of the NDC, which identifies the firm that 

manufactures, repackages, or distributes a drug; the second segment identifies a specific 

strength, dosage form, and formulation for a particular drug; and the third segment 

identifies package size. Three-segment NDCs are denoted by 11 digits while two-segment 

NDCs are denoted by 9 digits, and do not account for package size. Because our analysis 

focused on NDCs with the same drug name and strength, we based our analysis on NDC9s instead of NDC-11s.

5

To identify characteristics of brand-name drugs in each basket (e.g., drug name, 

strength), we used the July 2011 Red Book, published by Thomson Reuters.

6

Per CMS guidance for the Discount Program, we excluded PDE records for drugs not 

covered under Medicare Part D or that were compound drugs (drugs that are prepared by 

a pharmacist who mixes or adjusts drug ingredients to customize a medication). We also 

excluded PDE records in which the price the beneficiary paid for a drug may have been 

different than the drug price the beneficiary’s plan negotiated (e.g., because the 

beneficiary filled the prescription at a pharmacy not in the plan’s network) or the drug was 

not included in the beneficiary’s plan formulary.

7

When plan sponsors or pharmacy benefit managers on behalf of plan sponsors negotiate

drug prices with pharmacies, they typically negotiate discounts off a price that is 

established by manufacturers. A vaccination fee is the amount paid to a pharmacy or 

physician to cover the cost of administering a vaccination.
Appendix I: Methodology for Examining BrandName Drug Price Trends

Page 30 GAO-12-914 Medicare Part D Discount Program

our analysis, from January 2007 to December 2011, for data reliability 

purposes. After completing these data steps, we had two fixed baskets of 

drugs for which we could follow monthly prices throughout the period of 

our analysis. The fixed baskets included 77 brand-name drugs used by 

non-LIS beneficiaries in the coverage gap in 2011 and 78 brand-name 

drugs used by non-LIS beneficiaries who did not reach the coverage gap 

in 2011 (see app. II for a list of the brand-name drugs included in each 

basket).8

To analyze Medicare Part D price trends for the two baskets of brandname drugs, we created utilization-weighted price indexes using PDE 

data to track the monthly change in the median ingredient cost per unit for 

all drugs in each basket from January 2007 to December 2011.9 We used 

the median because it is not sensitive to the presence of extreme 

measurement errors. The ingredient cost reflects discounts negotiated 

with pharmacies but not certain price concessions such as drug 

manufacturer rebates.10 We tracked the ingredient cost for our analysis 

because it is subject to the 50 percent discount by manufacturers for 

brand-name drugs under the Discount Program and is affected by price 

changes made by the manufacturer. We tracked the ingredient cost per 

unit to account for varying quantities dispensed for a drug at the point-ofsale. We performed several data edits involving the quantity dispensed 

and ingredient cost per unit variables to further improve data reliability.11

 

8

For the first basket, we selected high-expenditure drugs that were used while non-LIS 

beneficiaries were in the coverage gap and did not include high-expenditure drugs used 

by these beneficiaries during the deductible and initial coverage periods, which are prior to 

the gap, or those used during the catastrophic coverage period, which is after the gap. 

9

Specifically, we used the Fisher price index, a commonly used price index formula, to 

measure the change in price per unit for each basket. The Fisher price index minimizes 

the problem of understating or overstating price changes by using the utilization from the 

first and last period of our analysis as weights. We used drug utilization from the first and 

last month of our analysis as weights. We calculated the ingredient cost per unit by 

dividing the drug’s ingredient cost by the quantity dispensed. The quantity dispensed is 

the total number of units, grams, or milliliters, and corresponds to the relevant unit of 

measurement for a drug.

10In 2011, CMS began collecting rebate information at the NDC level for the prior year 

(2010). CMS accounts for price concessions, such as rebates, at an aggregate level as 

part of its process to reconcile prospective payments with actual drug expenditures for 

each Part D plan sponsor.

11For example, we made adjustments to the quantity dispensed variable when reported 

values were less than 1 or greater than 1,000 (i.e., indicating the quantity may have been 

reported in incorrect units).
Appendix I: Methodology for Examining BrandName Drug Price Trends

Page 31 GAO-12-914 Medicare Part D Discount Program

We then trimmed the data to remove outliers.12

To further analyze Medicare Part D price trends, we calculated monthly 

changes in the median ingredient cost per unit of subsets of drugs of the 

two baskets of drugs. First, because a significant number of drugs—50—

overlapped both baskets, we compared price trends for the brand-name 

drugs that did not overlap.

To weight the baskets, we 

multiplied the monthly median ingredient cost per unit by each drug’s 

relative utilization, calculated as the ratio of the drug’s quantity dispensed 

to the total quantity dispensed for all drugs in the basket. To create the 

monthly price indexes for each basket, we summed the resulting 

weighted median ingredient cost per unit of all the drugs in the basket and 

divided the resulting value by the entire basket’s weighted median 

ingredient cost per unit as of January 2007. Each price index began with 

a value 100 as of January 2007.

13 Twenty-seven brand-name drugs were 

included only in the basket of drugs used by non-LIS beneficiaries in the 

coverage gap in 2011 and 28 were included only in the basket of drugs 

used by non-LIS beneficiaries who did not reach the coverage gap in 

2011. Second, within the basket of drugs used by beneficiaries in the 

coverage gap in 2011, we compared specialty-tier-eligible drugs, which 

are high-cost drugs, to non-specialty-tier-eligible drugs to examine 

whether specialty-tier-eligible drugs had different price changes than nonspecialty-tier-eligible drugs.14 We considered specialty-tier-eligible drugs

to be those drugs with a median cost that exceeded $60015 for a 30-day 

supply in 2011 (see app. II for a list of the brand-name drugs considered 

specialty-tier-eligible).16

 

12After performing these data edits, and trimming the data, which resulted in the exclusion 

of about 4 percent of PDEs from our analysis, the average coefficient of variation (i.e., the 

standard deviation divided by the mean) for the ingredient cost per unit variable improved, 

decreasing from 23 to 3 percent.

13While 50 brand-name drugs overlapped the two baskets, each of these drugs had a 

different weight depending on their relative utilization in each basket.

14The basket of brand-name drugs used by beneficiaries who did not reach the coverage 

gap in 2011 did not include specialty-tier-eligible drugs.

15CMS establishes a minimum cost threshold that drugs must exceed before Medicare 

Part D plans can place them on a specialty tier, and in 2011 the threshold was $600. 

16We calculated the cost based on the sum of the drug’s ingredient cost, sales tax, 

dispensing fee, and vaccination fee, if applicable.
Appendix I: Methodology for Examining BrandName Drug Price Trends

Page 32 GAO-12-914 Medicare Part D Discount Program

Our analyses of the trends in Medicare Part D prices are limited because 

we did not account for the multiple factors that can affect the prices of 

brand-name drugs over time. As a result, any changes we observed in 

prices may not be directly related to the implementation of the Discount 

Program. In addition, our analyses were limited to those brand-name 

drugs that had the highest total expenditures in 2011. We reviewed all 

data from CMS for reasonableness and consistency, including screening 

for outliers. We also reviewed documentation and talked to CMS officials 

about steps they take to ensure data reliability. We determined that these 

data were sufficiently reliable for our purposes.
Appendix II: Brand-Name Drugs Included in 

Price Trend Analyses

Page 33 GAO-12-914 Medicare Part D Discount Program

We analyzed the trend in Medicare Part D prices from January 2007 

through December 2011 for two baskets of brand-name drugs used by 

beneficiaries who did not receive a low-income subsidy (LIS). Table 3 lists 

the drugs we analyzed for both baskets:

• the 27 high-expenditure brand-name drugs unique to the basket of 

drugs used by non-LIS beneficiaries in the coverage gap in 2011,

• the 28 high-expenditure brand-name drugs unique to the basket of 

drugs used by non-LIS beneficiaries who did not reach the coverage 

gap in 2011, and

• the 50 high-expenditure brand-name drugs that overlapped both drug 

baskets.

Table 3: The High-Expenditure Brand-Name Drugs Used by Non-LIS Beneficiaries in 

the Coverage Gap and by Those Who Did Not Reach the Coverage Gap in 2011

Drug name, strength, route of administration, and dosage form

27 High-Expenditure Brand-Name Drugs Unique to the Basket of Drugs Used by 

non-LIS Beneficiaries in the Coverage Gap in 2011

1. Atripla (600mg-200mg-300mg/oral/tablet)

2. Avonex (30mcg/0.5ml/multiple routes/kit)

a

3. Azilect (1mg/oral/tablet)

a

4. Enbrel (50mg/1ml/subcutaneous/solution)

5. Enbrel (50mg/1ml/subcutaneous/solution)

a

6. Femara (2.5mg/oral/tablet)

a

7. Gleevec (400mg/oral/tablet)

8. Humalog (100u/1ml/subcutaneous/suspension)

a

9. Humalog MIX 75 25 (25u/1ml-75u/1ml/subcutaneous/suspension)

10. Humira

11. Januvia (50mg/oral/tablet)

a,b

12. Levemir (100u/1ml/subcutaneous/solution)

13. Lyrica (50mg/oral/capsule)

14. Namenda (5mg/oral/tablet)

15. Novolog (100u/1ml/subcutaneous/solution)

16. Novolog FLEXPEN (100u/1ml/subcutaneous/solution)

17. Novolog MIX 70 30 (30u/1ml-70u/1ml/subcutaneous/suspension)

18. Novolog MIX 70 30 (30u/1ml-70u/1ml/subcutaneous/suspension)

19. Sensipar (30mg/oral/tablet)

20. Seroquel (25mg/oral/tablet)

Appendix II: Brand-Name Drugs Included in 

Price Trend Analyses
Appendix II: Brand-Name Drugs Included in 

Price Trend Analyses

Page 34 GAO-12-914 Medicare Part D Discount Program

Drug name, strength, route of administration, and dosage form

21. Seroquel (50mg/oral/tablet)

22. Seroquel (100mg/oral/tablet)

23. Tarceva (150mg/oral/tablet)

24. Tracleer (125mg/oral/tablet)

a

25. Zyprexa (5mg/oral/tablet)

a

26. Zyprexa (10mg/oral/tablet)

27. Zyprexa (2.5mg/oral/tablet)

28 High-Expenditure Brand-Name Drugs Unique to the Basket of Drugs Used by 

Non-LIS Beneficiaries Who Did Not Reach the Coverage Gap in 2011

1. Actonel (35mg/tablet/oral)

2. Alphagan P (0.1%/ophthalmic/solution)

3. Avapro (300mg/oral/tablet)

4. Avapro (150mg/oral/tablet)

5. Avelox (400mg/oral/tablet)

6. Azopt (0.1%/ophthalmic/suspension)

7. Benicar (20mg/oral/tablet)

8. Benicar HCT (25mg-40mg/oral/tablet)

9. Benicar HCT (12.5mg-40mg/oral/tablet)

c

10. Diovan HCT(25mg-160mg/oral/tablet)

c

11. Diovan HCT(12.5mg-80mg/oral/tablet)

c

12. Diovan HCT (12.5mg-320mg/oral/tablet)

c

13. Flovent HFA (0.11mg/inhalation/aerosol)

c

14. Humulin N (100u/1ml/subcutaneous/suspension)

d

15. Klor Con 10 (10mEq/oral/tablet(ER))

16. Lumigan (0.03%/ophthalmic/solution)

e

17. Nasonex (0.05mg/nasal/spray)

18. Nevanac (0.10%/ophthalmic/solution)

19. Premarin (0.625mg/oral/tablet)

20. Premarin (0.3mg/oral/tablet)

21. Premarin vaginal (0.625mg/1gm/vaginal/cream)

22. Ventolin HFA (0.09mg/inhalation/aerosol)

23. Vigamox (0.50%/ophthalmic/solution)

d

24. Vytorin (10mg-40mg/oral/tablet)

25. Vytorin (10mg-20mg/oral/tablet)

26. Vytorin (10mg-80mg/oral/tablet)

27. Xalatan (0.01%/ophthalmic/solution)

28. Zostavax (19400pfu/subcutaneous/powder)
Appendix II: Brand-Name Drugs Included in 

Price Trend Analyses

Page 35 GAO-12-914 Medicare Part D Discount Program

Drug name, strength, route of administration, and dosage form

50 High-Expenditure Brand-Name Drugs that Overlapped the Basket of Drugs 

Used by Non-LIS Beneficiaries in the Coverage Gap in 2011 and the Basket of 

Drugs Used by Those Who Did Not Reach the Gap

1. Actos (30mg/oral/tablet)

2. Actos (45mg/oral/tablet)

3. Actos (15mg/oral/tablet)

4. Advair Diskus 100/50 (0.1mg-0.05m/inhalation/disk)

5. Advair Diskus 250/50 (0.25mg-0.0m/inhalation/disk)

6. Advair Diskus 500/50 (0.5mg-0.05m/inhalation/disk)

7. Aggrenox (25mg-200mg/oral/capsule(ER))

8. Asacol (400mg/oral/tablet)

e

9. Avodart (0.5mg/oral/capsule)

10. Benicar (40mg/oral/tablet)

11. Boniva (150mg/oral/tablet)

12. Celebrex (200mg/oral/capsule)

13. Combivent (0.09mg-0.018mg/inhalation/aerosol)

14. Crestor (10mg/oral/tablet)

15. Crestor (20mg/oral/tablet)

16. Crestor (40mg/oral/tablet)

17. Crestor (5mg/oral/tablet)

18. Cymbalta (30mg/oral/capsule(DR))

19. Detrol LA

f

g (4mg/oral/capsule (ER))

20. Diovan (160mg/oral/tablet)

e

21. Diovan (320mg/oral/tablet)

22. Diovan (80mg/oral/tablet)

23. Diovan HCT (25mg-320mg/oral/tablet)

24. Diovan HCT (12.5mg-160mg/oral/tablet)

c

25. Evista (60mg/oral/tablet)

c

26. Humulin 70 30 (70u/1ml-30u/1ml/subcutaneous/suspension)

27. Januvia (100mg/oral/tablet)

28. Lantus (100u/1ml/subcutaneous/solution)

29. Levemir (100u/1ml/subcutaneous/solution) 

30. Lexapro (10mg/oral/tablet)

31. Lexapro (20mg/oral/tablet)

32. Lidoderm (5%/topical/patch (ER))

33. Lipitor (20mg/oral/tablet)

e

34. Lipitor (40mg/oral/tablet)

35. Lipitor (10mg/oral/tablet)
Appendix II: Brand-Name Drugs Included in 

Price Trend Analyses

Page 36 GAO-12-914 Medicare Part D Discount Program

Drug name, strength, route of administration, and dosage form

36. Lipitor (80mg/oral/tablet)

37. Lyrica (75mg/oral/capsule)

38. Namenda (10mg/oral/tablet)

39. Nexium (40mg/oral/capsule (DR))

40. Plavix (75mg/oral/tablet)

f

41. Proair HFA (0.09mg/inhalation/aerosol)

42. Restasis (0.05%/ophthalmic/emulsion)

g

43. Singulair (10mg/oral/tablet)

44. Spiriva (18mcg/inhalation/capsule)

45. Travatan Z (0.004%/ophthalmic/solution)

46. Tricor (145mg/oral/tablet)

47. Vesicare (5mg/oral/tablet)

48. Vesicare (10mg/oral/tablet)

49. Welchol (625mg/oral/tablet)

50. Zetia (10mg/oral/tablet)

Source: GAO analysis of 2007 to 2011 Prescription Drug Event Data from CMS and July 2011 Red Book data.

Notes: The drug strength indicates how much of the active ingredient is present in each dosage. The 

route of administration is the way of administering a drug to a site in a patient. The dosage form is the 

physical form in which a drug is produced and dispensed, such as a tablet, a capsule, or an 

injectable. Brand-name drugs were selected using the nine-digit national drug code (NDC-9).

Levemir, Novolog MIX 70 30, and Enbrel are listed twice with the same strength, route of 

administration, and dosage form because each had two different NDC-9s.

a

We characterized these drugs as specialty-tier-eligible drugs because they had a median cost that 

exceeded $600 for a 30-day supply in 2011. CMS establishes a minimum cost threshold that drugs 

must exceed before Medicare Part D plans can place them on a specialty tier, and in 2011 the 

threshold was $600.

b

Humira is a biologic that comes as a solution that is injected. Biologics replicate natural substances 

such as enzymes, antibodies, or hormones, and according to the Food and Drug Administration, most 

biologics are complex mixtures that are not easily identified or characterized.

c

HCT=hydrochlorothiazide.

d

HFA=hydrofluoroalkanes.

e

ER=extended release.

f

DR=delayed release.

g

LA=long acting.
Appendix III: How the Discount Program Works 

at the Point-of-Sale for Brand-Name Drugs

Page 37 GAO-12-914 Medicare Part D Discount Program

Under the Medicare Coverage Gap Discount Program (Discount 

Program), the plan-negotiated drug price is the price used in the 

calculation of the 50 percent discount for brand-name drugs.1 The 50 

percent discount is based on the sum of the plan-negotiated drug price 

and the drug’s sales tax. This sum is called the discounted amount, and 

the beneficiary and manufacturer each pay 50 percent of the discounted 

amount. The beneficiary is also responsible for the drug’s dispensing fee 

and vaccination fee, if applicable.2

 

1

42 U.S.C. § 1395w-114a(g)(6); 77 Fed. Reg. 22072, 22080, 22172 (Apr. 12, 2012) (to be 

codified at 42 C.F.R. § 423.2305).

The entire cost of the drug, which 

includes the amount the beneficiary and manufacturer pays, is counted as 

out-of-pocket spending for the beneficiary, that is, towards the amount the 

beneficiary needs to move out of the coverage gap and into the 

catastrophic coverage period. Figure 4 provides a hypothetical example 

of how the 50 percent discount would be calculated at the point- of-sale 

for the purchase of a brand-name drug by a beneficiary who does not 

receive a low-income subsidy (non-LIS), is enrolled in a defined standard 

benefit plan in 2011, and has reached the coverage gap.

2

Both the dispensing and vaccination fees apply to the beneficiary’s out-of-pocket 

spending. Beginning in 2013, CMS will require that beneficiaries be responsible for only a 

portion of the drug dispensing fee for all applicable drugs while they are in the coverage 

gap. This portion is commensurate with the beneficiary coinsurance (e.g., 47.5 percent 

coinsurance for brand-name drugs in 2013). The plan sponsor will be responsible for 

paying the remaining portion of the dispensing fee. CMS, Announcement of Calendar 

Year (CY) 2013 Medicare Advantage Capitation Rates and Medicare Advantage and 

Part D Payment Policies and Final Call Letter, at 32, (Apr. 2, 2012). 

Appendix III: How the Discount Program 

Works at the Point-of-Sale for Brand-Name 

Drugs
Appendix III: How the Discount Program Works 

at the Point-of-Sale for Brand-Name Drugs

Page 38 GAO-12-914 Medicare Part D Discount Program

Figure 4: Hypothetical Example: A Non-LIS Beneficiary in a Standard Benefit Plan 

Purchasing a Brand-Name Drug While in the Coverage Gap in 2011

Note: The plan-negotiated drug price is the price that a plan sponsor, or pharmacy benefit manager 

on behalf of the plan sponsor, has negotiated for the beneficiary’s plan.
Appendix IV: Comments from the Department 

of Health and Human Services

Page 39 GAO-12-914 Medicare Part D Discount Program

Appendix IV: Comments from the 

Department of Health and Human Services
Appendix V: GAO Contact and Staff 

Acknowledgments

Page 40 GAO-12-914 Medicare Part D Discount Program

John E. Dicken, (202) 512-7114 or DickenJ@gao.gov

In addition to the contact named above, individuals making key 

contributions to this report include Rashmi Agarwal, Assistant Director; 

Zhi Boon; Robert Copeland; Pam Dooley; Seta Hovagimian; and Laurie 

Pachter.

Appendix V: GAO Contact and Staff 

Acknowledgments 

GAO Contact

Staff 

Acknowledgments 
Related GAO Products

Page 41 GAO-12-914 Medicare Part D Discount Program

Drug Pricing: Research on Savings from Generic Drug Use. 

GAO-12-371R. Washington, D.C.: January 31, 2012.

Prescription Drugs: Trends in Usual and Customary Prices for Commonly 

Used Drugs. GAO-11-306R. Washington, D.C.: February 10, 2011.

Medicare Part D: Spending, Beneficiary Out-of-Pocket Costs, and Efforts 

to Obtain Price Concessions for Certain High-Cost Drugs. GAO-10-529T. 

Washington, D.C.: March 17, 2010.

Medicare Part D: Spending, Beneficiary Cost Sharing, and CostContainment Efforts for High-Cost Drugs Eligible for a Specialty Tier. 

GAO-10-242. Washington, D.C.: January 29, 2010.

Brand-name Prescription Drug Pricing: Lack of Therapeutically Equivalent 

Drugs and Limited Competition May Contribute to Extraordinary Price 

Increases. GAO-10-201. Washington, D.C.: December 22, 2009. 

Medicare Part D Prescription Drug Coverage: Federal Oversight of 

Reported Price Concessions Data. GAO-08-1074R. Washington, D.C.: 

September 30, 2008.

Prescription Drugs: Trends in Usual and Customary Prices for Drugs 

Frequently Used by Medicare and Non-Medicare Health Insurance 

Enrollees. GAO-07-1201R. Washington, D.C.: September 7, 2007.

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August 15, 2005.

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