‘‘(iii) Receive, disburse, and account 
for funds used in making such payments, 
including through the activities specified in 
the provisions of this paragraph. 
‘‘(B) 
COORDINATION.—Coordinate 
with 
other private benefit providers, pharmacies, and 
other relevant entities as necessary to ensure 
appropriate coordination of benefits with re-
spect to enrolled individuals, including coordina-
tion of access to and payment for covered pre-
scription medicines according to an individual’s 
in-service area plan provisions, when such indi-
vidual is traveling outside the home service 
area, and under such other circumstances as 
the Secretary may specify. 
‘‘(C) EXPLANATION OF BENEFITS.—Fur-
nish to enrolled individuals an explanation of 
benefits in accordance with section 1806(a), 
and a notice of the balance of benefits remain-
ing for the current year, whenever prescription 
medicine benefits are provided under this part 
(except that such notice need not be provided 
more often than monthly). 
‘‘(4) RULES RELATING TO PROVISION OF BENE-
FITS.—
‘‘(A) IN GENERAL.—In providing benefits 
under this part, the Secretary (directly or 
through contracts) shall employ mechanisms to 
provide benefits economically, including the use 
of— 
‘‘(i) formularies (consistent with sub-
paragraph (B)); 
‘‘(ii) automatic generic medicine sub-
stitution (unless the physician specifies 
otherwise, in which case a 30-day prescrip-
tion may be dispensed pending a consulta-
tion with the physician on whether a ge-
neric substitute can be dispensed in the fu-
ture); 
‘‘(iii) tiered copayments (which may 
include copayments at a rate lower than 20 
percent) to encourage the use of the lowest 
cost, on-formulary product in cases where 
there is no restrictive prescription (de-
scribed in subparagraph (D)(i)); and 
‘‘(iv) therapeutic interchange. 
‘‘(B) REQUIREMENTS WITH RESPECT TO 
FORMULARIES.—If a formulary is used to con-
tain costs under this part—
‘‘(i) use an advisory committee (or a 
therapeutics committee) comprised of li-
censed practicing physicians, pharmacists, 
and other health care practitioners to de-
velop and manage the formulary; 
‘‘(ii) include in the formulary at least 
one medicine from each therapeutic class 
and, if available, a generic equivalent 
thereof; and 
‘‘(iii) disclose to current and prospec-
tive enrollees and to participating providers 
and pharmacies, the nature of the for-
mulary restrictions, including information 
regarding the medicines included in the 
formulary and any difference in cost-shar-
ing amounts. 
‘‘(C) CONSTRUCTION.—Nothing in this 
subsection shall be construed to prevent the 
Secretary (directly or through contracts) from 
using incentives (including a lower beneficiary 
coinsurance) to encourage enrollees to select ge-
neric or other cost-effective medicines, so long 
as— 
‘‘(i) such incentives are designed not 
to result in any increase in the aggregate
expenditures under the Federal Medicare 
Prescription Medicine Trust Fund; 
‘‘(ii) the average coinsurance charged 
to all beneficiaries by the Secretary (di-
rectly or through contractors) shall seek to 
approximate (but in no case exceed) 20 
percent for on-formulary medicines; 
‘‘(iii) a beneficiary’s coinsurance shall 
be no greater than 20 percent if the pre-
scription is a restrictive prescription; and 
‘‘(iv) the reimbursement for a pre-
scribed nonformulary medicine without a 
restrictive prescription in no case shall be 
more than the lowest reimbursement for a 
formulary medicine in the therapeutic class 
of the prescribed medicine. 
‘‘(D) RESTRICTIVE
PRESCRIPTION.—For 
purposes of this section: 
‘‘(i) WRITTEN
PRESCRIPTIONS.—In 
the case of a written prescription for a 
medicine, it is a restrictive prescription 
only if the prescription indicates, in the 
writing of the physician or other qualified 
person prescribing the medicine and with 
an appropriate phrase (such as ‘brand
medically necessary’) recognized by the 
Secretary, that a particular medicine prod-
uct must be dispensed based upon a belief 
by the physician or person prescribing the 
medicine that the particular medicine will 
provide even marginally superior thera-
peutic benefits to the individual for whom 
the medicine is prescribed or would have 
marginally fewer adverse reactions with re-
spect to such individual. 
‘‘(ii) TELEPHONE
PRESCRIPTIONS.— 
In the case of a prescription issued by tele-
phone for a medicine, it is a restrictive 
prescription only if the prescription cannot 
be longer than 30 days and the physician 
or other qualified person prescribing the 
medicine (through use of such an appro-
priate phrase) states that a particular 
medicine product must be dispensed, and 
the physician or other qualified person sub-
mits to the pharmacy involved, within 30 
days after the date of the telephone pre-
scription, a written confirmation from the 
physician or other qualified person pre-
scribing the medicine and which indicates
with such appropriate phrase that the par-
ticular medicine product was required to 
have been dispensed based upon a belief by 
the physician or person prescribing the 
medicine that the particular medicine will 
provide even marginally superior thera-
peutic benefits to the individual for whom 
the medicine is prescribed or would have 
marginally fewer adverse reactions with re-
spect to such individual. Such written con-
firmation is required to refill the prescrip-
tion. 
‘‘(iii) REVIEW OF RESTRICTIVE PRE-
SCRIPTIONS.—The advisory committee (es-
tablished under subparagraph (B)(i)) may 
decide to review a restrictive prescription 
and, if so, it may approve or disapprove 
such restrictive prescription. It may not 
disapprove such restrictive prescription un-
less it finds that there is no literature ap-
proved by the Food and Drug Administra-
tion that supports a determination that the 
particular medicine provides even margin-
ally superior therapeutic benefits to the in-
dividual for whom the medicine is pre-
scribed or would have marginally fewer ad-
verse reactions with respect to such indi-
vidual. If it disapproves, upon request of 
the prescribing physician or the enrollee, 
the committee must provide for a review by 
an independent contractor of such decision 
within 48 hours of the time of submission 
of the prescription, to determine whether 
the prescription is an eligible benefit under 
this part. The Secretary shall ensure that 
independent contractors so used are com-
pletely independent of the contractor or its 
advisory committee. 
‘‘(5) COST
AND
UTILIZATION
MANAGEMENT; 
QUALITY ASSURANCE.—Have in place effective cost 
and utilization management, drug utilization review, 
quality assurance measures, and systems to reduce 
medical errors, including at least the following, to-
gether with such additional measures as the Admin-
istrator may specify: 
‘‘(A) DRUG UTILIZATION REVIEW.—A drug 
utilization review program conforming to the 
standards provided in section 1927(g)(2) (with 
such modifications as the Administrator finds 
appropriate).
‘‘(B) FRAUD AND ABUSE CONTROL.—Ac-
tivities to control fraud, abuse, and waste, in-
cluding prevention of diversion of pharma-
ceuticals to the illegal market. 
‘‘(C) 
MEDICATION
THERAPY
MANAGE-
MENT.— 
‘‘(i) IN
GENERAL.—A program of 
medicine therapy management and medica-
tion administration that is designed to as-
sure that covered outpatient medicines are 
appropriately used to achieve therapeutic 
goals and reduce the risk of adverse 
events, including adverse drug interactions. 
‘‘(ii) ELEMENTS.—Such program may 
include— 
‘‘(I) enhanced beneficiary under-
standing of such appropriate use 
through beneficiary education, coun-
seling, and other appropriate means; 
and 
‘‘(II) increased beneficiary adher-
ence with prescription medication 
regimens through medication refill re-
minders, special packaging, and other 
appropriate means.
‘‘(iii) DEVELOPMENT OF PROGRAM IN 
COOPERATION
WITH
LICENSED
PHAR-
MACISTS.—The program shall be developed 
in cooperation with licensed pharmacists 
and physicians. 
‘‘(iv) CONSIDERATIONS IN PHARMACY 
FEES.—There shall be taken into account, 
in establishing fees for pharmacists and 
others providing services under the medica-
tion therapy management program, the re-
sources and time used in implementing the 
program. 
‘‘(6) EDUCATION
AND
INFORMATION
ACTIVI-
TIES.—Have in place mechanisms for disseminating 
educational and informational materials to enrolled 
individuals and health care providers designed to en-
courage effective and cost-effective use of prescrip-
tion medicine benefits and to ensure that enrolled in-
dividuals understand their rights and obligations 
under the program. 
‘‘(7) BENEFICIARY PROTECTIONS.— 
‘‘(A) CONFIDENTIALITY
OF
HEALTH
IN-
FORMATION.—Have in effect systems to safe-
guard the confidentiality of health care infor-
mation on enrolled individuals, which comply
with section 1106 and with section 552a of title 
5, United States Code, and meet such addi-
tional standards as the Administrator may pre-
scribe. 
‘‘(B) GRIEVANCE
AND
APPEAL
PROCE-
DURES.—Have in place such procedures as the 
Administrator may specify for hearing and re-
solving grievances and appeals, including expe-
dited appeals, brought by enrolled individuals 
against the Administrator or a pharmacy con-
cerning benefits under this part, which shall in-
clude procedures equivalent to those specified in 
subsections (f) and (g) of section 1852. 
‘‘(8) RECORDS, REPORTS, AND AUDITS.— 
‘‘(A) RECORDS
AND
AUDITS.—Maintain 
adequate records, and afford the Administrator 
access to such records (including for audit pur-
poses). 
‘‘(B) REPORTS.—Make such reports and 
submissions of financial and utilization data as 
the Administrator may require taking into ac-
count standard commercial practices. 
‘‘(9) PROPOSAL
FOR
ALTERNATIVE
COINSUR-
ANCE AMOUNT.—
‘‘(A) 
SUBMISSION.—The 
Administrator 
may provide for increased Government cost- 
sharing for generic prescription medicines, pre-
scription medicines on a formulary, or prescrip-
tion medicines obtained through mail order 
pharmacies. 
‘‘(B) CONTENTS.—The proposal submitted 
under subparagraph (A) shall contain evidence 
that such increased cost-sharing would not re-
sult in an increase in aggregate costs to the Ac-
count, including an analysis of differences in 
projected drug utilization patterns by bene-
ficiaries whose cost-sharing would be reduced 
under the proposal and those making the cost- 
sharing payments that would otherwise apply. 
‘‘(10) OTHER
REQUIREMENTS.—Meet such 
other requirements as the Secretary may specify. 
The Administrator shall negotiate a schedule of prices 
under paragraph (1)(A), except that nothing in this sen-
tence shall prevent a carrier under a contract with the Ad-
ministrator from negotiating a lower schedule of prices for 
covered prescription medicines. 
‘‘(c) PHARMACY PARTICIPATION AGREEMENTS.— 
‘‘(1) IN GENERAL.—A pharmacy that meets the 
requirements of this subsection shall be eligible to
enter an agreement with the Administrator to fur-
nish covered prescription medicines and pharmacists’ 
services to enrolled individuals. 
‘‘(2) TERMS OF AGREEMENT.—An agreement 
under this subsection shall include the following 
terms and requirements: 
‘‘(A) LICENSING.—The pharmacy and 
pharmacists shall meet (and throughout the 
contract period will continue to meet) all appli-
cable State and local licensing requirements. 
‘‘(B) LIMITATION
ON
CHARGES.—Phar-
macies participating under this part shall not 
charge an enrolled individual more than the ne-
gotiated price for an individual medicine as es-
tablished under subsection (b)(1), regardless of 
whether such individual has attained the benefit 
limit under section 1860B(b), and shall not 
charge an enrolled individual more than the in-
dividual’s share of the negotiated price as deter-
mined under the provisions of this part. 
‘‘(C) 
PERFORMANCE
STANDARDS.—The 
pharmacy and the pharmacist shall comply with 
performance standards relating to— 
‘‘(i) measures for quality assurance, 
reduction of medical errors, and participa-
tion in the drug utilization review program 
described in subsection (b)(3)(A); 
‘‘(ii) systems to ensure compliance 
with the confidentiality standards applica-
ble under subsection (b)(5)(A); and 
‘‘(iii) other requirements as the Sec-
retary may impose to ensure integrity, effi-
ciency, and the quality of the program. 
‘‘(D) DISCLOSURE OF PRICE OF GENERIC 
MEDICINE.—A pharmacy participating under 
this part shall inform an enrollee of the dif-
ference in price between generic and non-ge-
neric equivalents. 
‘‘(d) SPECIAL ATTENTION TO RURAL AND HARD-TO- 
SERVE AREAS.— 
‘‘(1) IN GENERAL.—The Secretary shall ensure 
that all beneficiaries have access to the full range of 
pharmaceuticals under this part, and shall give spe-
cial attention to access, pharmacist counseling, and 
delivery in rural and hard-to-serve areas (as the Sec-
retary may define by regulation). 
‘‘(2) SPECIAL ATTENTION DEFINED.—For pur-
poses of paragraph (1), the term ‘special attention’ 
may include bonus payments to retail pharmacists in 
rural areas and any other actions the Secretary de-
termines are necessary to ensure full access to rural 
and hard-to-serve beneficiaries. 
‘‘(3) GAO REPORT.—Not later than two years 
after the implementation of this part the Comp-
troller General of the United States shall submit to 
Congress a report on the access of medicare bene-
ficiaries to pharmaceuticals and pharmacists’ serv-
ices in rural and hard-to-serve areas under this part 
together with any recommendations of the Comp-
troller General regarding any additional steps the 
Secretary may need to take to ensure the access of 
medicare beneficiaries to pharmaceuticals and phar-
macists’ services in such areas under this part. 
‘‘(e) INCENTIVES FOR COST AND UTILIZATION MAN-
AGEMENT AND QUALITY IMPROVEMENT.—The Secretary 
is authorized to include in a contract awarded under sub-
section (b) with a carrier such incentives for cost and utili-
zation management and quality improvement as the Sec-
retary may deem appropriate, including— 
‘‘(1) bonus and penalty incentives to encourage 
administrative efficiency; 
‘‘(2) incentives under which carriers share in 
any benefit savings achieved; 
‘‘(3) risk-sharing arrangements related to ini-
tiatives to encourage savings in benefit payments;
‘‘(4) financial incentives under which savings 
derived from the substitution of generic medicines in 
lieu of non-generic medicines are made available to 
carriers, pharmacies, and the Prescription Medicine 
Insurance Account; and 
‘‘(5) any other incentive that the Secretary 
deems appropriate and likely to be effective in man-
aging costs or utilization. 
‘‘EMPLOYER INCENTIVE PROGRAM FOR EMPLOYMENT- 
BASED RETIREE MEDICINE COVERAGE 
‘‘SEC. 1860H. (a) PROGRAM AUTHORITY.—The Sec-
retary shall develop and implement a program under this 
section called the ‘Employer Incentive Program’ that en-
courages employers and other sponsors of employment- 
based health care coverage to provide adequate prescrip-
tion medicine benefits to retired individuals and to main-
tain such existing benefit programs, by subsidizing, in 
part, the sponsor’s cost of providing coverage under quali-
fying plans. 
‘‘(b) SPONSOR REQUIREMENTS.—In order to be eligi-
ble to receive an incentive payment under this section with 
respect to coverage of an individual under a qualified re-
tiree prescription medicine plan (as defined in subsection 
(f)(3)), a sponsor shall meet the following requirements: 
‘‘(1) ASSURANCES.—The sponsor shall—
‘‘(A) annually attest, and provide such as-
surances as the Secretary may require, that the 
coverage offered by the sponsor is a qualified 
retiree prescription medicine plan, and will re-
main such a plan for the duration of the spon-
sor’s participation in the program under this 
section; and 
‘‘(B) guarantee that it will give notice to 
the Secretary and covered retirees— 
‘‘(i) at least 120 days before termi-
nating its plan; and 
‘‘(ii) immediately upon determining 
that the actuarial value of the prescription 
medicine benefit under the plan falls below 
the actuarial value of the insurance benefit 
under this part. 
‘‘(2) OTHER
REQUIREMENTS.—The sponsor 
shall provide such information, and comply with 
such requirements, including information require-
ments to ensure the integrity of the program, as the 
Secretary may find necessary to administer the pro-
gram under this section. 
‘‘(c) INCENTIVE PAYMENT.— 
‘‘(1) IN GENERAL.—A sponsor that meets the 
requirements of subsection (b) with respect to a
quarter in a calendar year shall have payment made 
by the Secretary on a quarterly basis (to the sponsor 
or, at the sponsor’s direction, to the appropriate em-
ployment-based health plan) of an incentive pay-
ment, in the amount determined as described in 
paragraph (2), for each retired individual (or 
spouse) who— 
‘‘(A) was covered under the sponsor’s 
qualified retiree prescription medicine plan dur-
ing such quarter; and 
‘‘(B) was eligible for but was not enrolled 
in the insurance program under this part. 
‘‘(2) AMOUNT
OF
INCENTIVE.—The payment 
under this section with respect to each individual de-
scribed in paragraph (1) for a month shall be equal 
to 2⁄3 of the monthly premium amount payable from 
the Prescription Medicine Insurance Account for an 
enrolled individual, as set for the calendar year pur-
suant to section 1860D(a)(2). 
‘‘(3) PAYMENT
DATE.—The incentive under 
this section with respect to a calendar quarter shall 
be payable as of the end of the next succeeding cal-
endar quarter. 
‘‘(d) CIVIL MONEY PENALTIES.—A sponsor, health 
plan, or other entity that the Secretary determines has,
directly or through its agent, provided information in con-
nection with a request for an incentive payment under this 
section that the entity knew or should have known to be 
false shall be subject to a civil monetary penalty in an 
amount equal to $2,000 for each false representation plus 
an amount not to exceed three times the total incentive 
amounts under subsection (c) that were paid (or would 
have been payable) on the basis of such information. 
‘‘(e) PART D ENROLLMENT FOR CERTAIN INDIVID-
UALS
COVERED
BY
EMPLOYMENT-BASED
RETIREE 
HEALTH COVERAGE PLANS.— 
‘‘(1) ELIGIBLE
INDIVIDUALS.—An individual 
shall be given the opportunity to enroll in the pro-
gram under this part during the period specified in 
paragraph (2) if— 
‘‘(A) the individual declined enrollment in 
the program under this part at the time the in-
dividual first satisfied section 1860C(a); 
‘‘(B) at that time, the individual was cov-
ered under a qualified retiree prescription medi-
cine plan for which an incentive payment was 
paid under this section; and 
‘‘(C)(i) the sponsor subsequently ceased to 
offer such plan; or
‘‘(ii) the value of prescription medicine cov-
erage under such plan is reduced below the 
value of the coverage provided at the time the 
individual first became eligible to participate in 
the program under this part. 
‘‘(2) SPECIAL ENROLLMENT PERIOD.—An indi-
vidual described in paragraph (1) shall be eligible to 
enroll in the program under this part during the six- 
month period beginning on the first day of the 
month in which— 
‘‘(A) the individual receives a notice that 
coverage under such plan has terminated (in 
the 
circumstance 
described 
in 
paragraph 
(1)(C)(i)) or notice that a claim has been de-
nied because of such a termination; or 
‘‘(B) the individual received notice of the 
change in benefits (in the circumstance de-
scribed in paragraph (1)(C)(ii)). 
‘‘(f) DEFINITIONS.—In this section: 
‘‘(1) EMPLOYMENT-BASED
RETIREE
HEALTH 
COVERAGE.—The term ‘employment-based retiree 
health coverage’ means health insurance or other 
coverage of health care costs for retired individuals 
(or for such individuals and their spouses and de-
pendents) based on their status as former employees 
or labor union members. 
‘‘(2) EMPLOYER.—The term ‘employer’ has the 
meaning given to such term by section 3(5) of the 
Employee Retirement Income Security Act of 1974 
(except that such term shall include only employers 
of two or more employees). 
‘‘(3) QUALIFIED RETIREE PRESCRIPTION MEDI-
CINE PLAN.—The term ‘qualified retiree prescription 
medicine plan’ means health insurance coverage in-
cluded in employment-based retiree health coverage 
that— 
‘‘(A) provides coverage of the cost of pre-
scription medicines whose actuarial value to 
each retired beneficiary equals or exceeds the 
actuarial value of the benefits provided to an in-
dividual enrolled in the program under this 
part; and 
‘‘(B) does not deny, limit, or condition the 
coverage or provision of prescription medicine 
benefits for retired individuals based on age or 
any health status-related factor described in 
section 2702(a)(1) of the Public Health Service 
Act.
‘‘(4) SPONSOR.—The term ‘sponsor’ has the 
meaning given the term ‘plan sponsor’ by section 
3(16)(B) of the Employee Retirement Income Secu-
rity Act of 1974. 
‘‘PROMOTION
OF
PHARMACEUTICAL
RESEARCH
ON 
BREAK-THROUGH
MEDICINES
WHILE
PROVIDING 
PROGRAM COST CONTAINMENT 
‘‘SEC. 1860I. (a) MONITORING EXPENDITURES.— 
The Secretary shall monitor expenditures under this part. 
On October 1, 2007, the Secretary shall estimate total ex-
penditures under this part for 2007. 
‘‘(b) ESTABLISHMENT
OF SUSTAINABLE GROWTH 
RATE.— 
‘‘(1) IN GENERAL.—The Secretary shall estab-
lish a sustainable growth rate prescription medicine 
target system for expenditures under this part for 
each year after 2007. 
‘‘(2) INITIAL COMPUTATION.—Such target shall 
equal the amount of total expenditures estimated for 
2007 adjusted by the Secretary’s estimate of a sus-
tainable growth rate (in this section referred to as 
an ‘SGR’) percentage between 2007 and 2008. Such 
SGR shall be estimated based on the following: 
‘‘(A) Reasonable changes in the cost of 
production or price of covered pharmaceuticals, 
but in no event more than the rate of increase
in the consumer price index for all urban con-
sumers for the period involved. 
‘‘(B) Population enrolled in this part, both 
in numbers and in average age and severity of 
chronic and acute illnesses. 
‘‘(C) Appropriate changes in utilization of 
pharmaceuticals, as determined by the Drug 
Review Board (established under subsection 
(c)(3)) and based on best estimates of utiliza-
tion change if there were no direct-to-consumer 
advertising or promotions to providers. 
‘‘(D) Productivity index of manufacturers 
and distributors. 
‘‘(E) Percentage of products with patent 
and market exclusivity protection versus prod-
ucts without patent protection and changes in 
the availability of generic substitutes. 
‘‘(F) Such other factors as the Secretary 
may determine are appropriate. 
In no event may the sustainable growth rate exceed 
120 percent of the estimated per capita growth in 
total spending under this title. 
‘‘(3) 
COMPUTATION
FOR
SUBSEQUENT 
YEARS.—In October of 2008 and each year there-
after, for purposes of setting the SGRs for the suc-
ceeding year, the Secretary shall adjust each current 
year’s estimated expenditures by the estimated SGR 
for the succeeding year, further adjusted for correc-
tions in earlier estimates and the receipt of addi-
tional data on previous years spending as follows: 
‘‘(A) ERROR ESTIMATES.—An adjustment 
(up or down) for errors in the estimate of total 
expenditures under this part for the previous 
year. 
‘‘(B) COSTS.—An adjustment (up or 
down) for corrections in the cost of production 
of prescriptions covered under this part between 
the current calendar year and the previous year. 
‘‘(C) TARGET.—An adjustment for any 
amount (over or under) that expenditures in the 
current year under this part are estimated to 
differ from the target amount set for the year. 
If expenditures in the current year are esti-
mated to be— 
‘‘(i) less than the target amount, fu-
ture target amounts will be adjusted down-
ward; or 
‘‘(ii) more than the target amount, 
the Secretary shall notify all pharma-
ceutical manufacturers with sales of phar-
maceutical prescription medicine products 
to medicare beneficiaries under this part, 
of a rebate requirement (except as pro-
vided in this subparagraph) to be deposited 
in the Federal Medicare Prescription Medi-
cine Trust Fund. 
‘‘(D) 
REBATE
DETERMINATION.—The 
amount of the rebate described in subparagraph 
(C)(ii) may vary among manufacturers and 
shall be based on the manufacturer’s estimated 
contribution to the expenditure above the target 
amount, taking into consideration such factors 
as— 
‘‘(i) above average increases in the 
cost of the manufacturer’s product; 
‘‘(ii) increases in utilization due to 
promotion activities of the manufacturer, 
wholesaler, or retailer; 
‘‘(iii) launch prices of new drugs at 
the same or higher prices as similar drugs 
already in the marketplace (so-called ‘me 
too’ or ‘copy-cat’ drugs); 
‘‘(iv) the role of the manufacturer in 
delaying the entry of generic products into 
the market; and
‘‘(v) such other actions by the manu-
facturer that the Secretary may determine 
has contributed to the failure to meet the 
SGR target. 
The rebates shall be established under such 
subparagraph so that the total amount of the 
rebates is estimated to ensure that the amount 
the target for the current year is estimated to 
be exceeded is recovered in lower spending in 
the subsequent year; except that, no rebate 
shall be made in any manufacturer’s product 
which the Food and Drug Administration has 
determined is a breakthrough medicine (as de-
termined under subsection (c)) or an orphan 
medicine. 
‘‘(c) BREAKTHROUGH MEDICINES.— 
‘‘(1) DETERMINATION.—For purposes of this 
section, a medicine is a ‘breakthrough medicine’ if 
the Drug Review Board (established under para-
graph (3)) determines— 
‘‘(A) it is a new product that will make a 
significant and major improvement by reducing 
physical or mental illness, reducing mortality, 
or reducing disability; and
‘‘(B) that no other product is available to 
beneficiaries that achieves similar results for 
the same condition at a lower cost. 
‘‘(2) CONDITION.—An exemption from rebates 
under subsection (b)(3) for a breakthrough medicine 
shall continue as long as the medicine is certified as 
a breakthrough medicine but shall be limited to 
seven calendar years from 2007 or seven calendar 
years from the date of the initial determination 
under paragraph (1), whichever is later. 
‘‘(3) DRUG REVIEW BOARD.—The Drug Review 
Board under this paragraph shall consist of the 
Commissioner of Food and Drugs, the Directors of 
the National Institutes of Health, the Director of 
the National Science Foundation, and 10 experts in 
pharmaceuticals, medical research, and clinical care, 
selected by the Commissioner of Food and Drugs 
from the faculty of academic medical centers, except 
that no person who has (or who has an immediate 
family member that has) any conflict of interest with 
any pharmaceutical manufacturer shall serve on the 
Board. 
‘‘(d) NO REVIEW.—The Secretary’s determination of 
the rebate amounts under this section, and the Drug Re-
view Board’s determination of what is a breakthrough 
drug, are not subject to administrative or judicial review. 
‘‘APPROPRIATIONS TO COVER GOVERNMENT 
CONTRIBUTIONS 
‘‘SEC. 1860J. (a) IN GENERAL.—There are author-
ized to be appropriated from time to time, out of any mon-
eys in the Treasury not otherwise appropriated, to the 
Prescription Medicine Insurance Account, a Government 
contribution equal to— 
‘‘(1) the aggregate premiums payable for a 
month pursuant to section 1860D(a)(2) by individ-
uals enrolled in the program under this part; plus 
‘‘(2) one-half the aggregate premiums payable 
for a month pursuant to such section for such indi-
viduals by former employers; plus 
‘‘(3) the benefits payable by reason of the appli-
cation of paragraph (2) of section 1860B(a) (relat-
ing to catastrophic benefits). 
‘‘(b) APPROPRIATIONS TO COVER INCENTIVES FOR 
EMPLOYMENT-BASED RETIREE MEDICINE COVERAGE.— 
There are authorized to be appropriated to the Prescrip-
tion Medicine Insurance Account from time to time, out 
of any moneys in the Treasury not otherwise appropriated 
such sums as may be necessary for payment of incentive 
payments under section 1860H(c).
‘‘PRESCRIPTION MEDICINE DEFINED 
‘‘SEC. 1860K. 
As used in this part, the term ‘prescription medicine’ 
means— 
‘‘(1) a drug that may be dispensed only upon 
a prescription, and that is described in subpara-
graph (A)(i), (A)(ii), or (B) of section 1927(k)(2); 
and 
‘‘(2) insulin certified under section 506 of the 
Federal Food, Drug, and Cosmetic Act, and needles, 
syringes, and disposable pumps for the administra-
tion of such insulin.’’. 
(b) CONFORMING AMENDMENTS.— 
(1) 
AMENDMENTS
TO
FEDERAL
SUPPLE-
MENTARY HEALTH INSURANCE TRUST FUND.—Sec-
tion 1841 of the Social Security Act (42 U.S.C. 
1395t) is amended— 
(A) in the last sentence of subsection (a)— 
(i) by striking ‘‘and’’ after ‘‘section 
201(i)(1)’’; and 
(ii) by inserting before the period the 
following: ‘‘, and such amounts as may be 
deposited in, or appropriated to, the Pre-
scription Medicine Insurance Account es-
tablished by section 1860F’’;
(B) in subsection (g), by inserting after 
‘‘by this part,’’ the following: ‘‘the payments 
provided for under part D (in which case the 
payments shall come from the Prescription 
Medicine Insurance Account in the Supple-
mentary Medical Insurance Trust Fund),’’; 
(C) in the first sentence of subsection (h), 
by inserting before the period the following: 
‘‘and section 1860D(b)(4) (in which case the 
payments shall come from the Prescription 
Medicine Insurance Account in the Supple-
mentary Medical Insurance Trust Fund)’’; and 
(D) in the first sentence of subsection 
(i)— 
(i) by striking ‘‘and’’ after ‘‘section 
1840(b)(1)’’; and 
(ii) by inserting before the period the 
following: ‘‘, section 1860D(b)(2) (in which 
case the payments shall come from the 
Prescription Medicine Insurance Account 
in the Supplementary Medical Insurance 
Trust Fund)’’. 
(2) PRESCRIPTION
MEDICINE
OPTION
UNDER 
MA PLANS.—
(A) ELIGIBILITY, ELECTION, AND ENROLL-
MENT.—Section 1851 of the Social Security Act 
(42 U.S.C. 1395w–21) is amended— 
(i) in subsection (a)(1)(A), by striking 
‘‘parts A and B’’ and inserting ‘‘parts A, 
B, and D’’; and 
(ii) in subsection (i)(1), by striking 
‘‘parts A and B’’ and inserting ‘‘parts A, 
B, and D’’. 
(B) VOLUNTARY
BENEFICIARY
ENROLL-
MENT
FOR
MEDICINE
COVERAGE.—Section 
1852(a)(1)(A) of such Act (42 U.S.C. 1395w– 
22(a)(1)(A)) is amended by inserting ‘‘(and 
under part D to individuals also enrolled under 
that part)’’ after ‘‘parts A and B’’. 
(C) 
ACCESS
TO
SERVICES.—Section 
1852(d)(1) of such Act (42 U.S.C. 1395w– 
22(d)(1)) is amended— 
(i) in subparagraph (D), by striking 
‘‘and’’ at the end; 
(ii) in subparagraph (E), by striking 
the period at the end and inserting ‘‘; 
and’’; and 
(iii) by adding at the end the fol-
lowing new subparagraph:
‘‘(F) the plan for prescription medicine 
benefits under part D guarantees coverage of 
any specifically named covered prescription 
medicine for an enrollee, when prescribed by a 
physician in accordance with the provisions of 
such part, regardless of whether such medicine 
would otherwise be covered under an applicable 
formulary or discount arrangement.’’. 
(D) PAYMENTS TO ORGANIZATIONS.—Sec-
tion 1853(a)(1)(A) of such Act (42 U.S.C. 
1395w–23(a)(1)(A)) is amended— 
(i) by inserting ‘‘determined sepa-
rately for benefits under parts A and B 
and under part D (for individuals enrolled 
under that part)’’ after ‘‘as calculated 
under subsection (c)’’; 
(ii) by striking ‘‘that area, adjusted 
for such risk factors’’ and inserting ‘‘that 
area. In the case of payment for benefits 
under parts A and B, such payment shall 
be adjusted for such risk factors as’’; and 
(iii) by inserting before the last sen-
tence the following: ‘‘In the case of the 
payments for benefits under part D, such 
payment shall initially be adjusted for the
risk factors of each enrollee as the Sec-
retary determines to be feasible and appro-
priate. By 2010, the adjustments would be 
for the same risk factors applicable for 
benefits under parts A and B.’’. 
(E) CALCULATION OF ANNUAL MA CAPITA-
TION RATES.—Section 1853(c) of such Act (42 
U.S.C. 1395w–23(c)) is amended— 
(i) in paragraph (1), in the matter 
preceding subparagraph (A), by inserting 
‘‘for benefits under parts A and B’’ after 
‘‘capitation rate’’; 
(ii) in paragraph (6)(A), by striking 
‘‘rate of growth in expenditures under this 
title’’ and inserting ‘‘rate of growth in ex-
penditures for benefits available under 
parts A and B’’; and 
(iii) by adding at the end the fol-
lowing new paragraph: 
‘‘(8) PAYMENT
FOR
PRESCRIPTION
MEDI-
CINES.—The Secretary shall determine a capitation 
rate for prescription medicines— 
‘‘(A) dispensed in 2007, which is based on 
the projected national per capita costs for pre-
scription medicine benefits under part D and
associated claims processing costs for bene-
ficiaries under the original medicare fee-for- 
service program; and 
‘‘(B) dispensed in each subsequent year, 
which shall be equal to the rate for the previous 
year updated by the Secretary’s estimate of the 
projected per capita rate of growth in expendi-
tures under this title for an individual enrolled 
under part D.’’. 
(F) LIMITATION
ON
ENROLLEE
LIABIL-
ITY.—Section 1854(e) of such Act (42 U.S.C. 
1395w–24(e)) is amended by adding at the end 
the following new paragraph: 
‘‘(5) SPECIAL RULE FOR PROVISION OF PART D 
BENEFITS.—In no event may a Medicare Advantage 
organization include as part of a plan for prescrip-
tion medicine benefits under part D a requirement 
that an enrollee pay a deductible, or a coinsurance 
percentage that exceeds 20 percent.’’. 
(G) REQUIREMENT FOR ADDITIONAL BEN-
EFITS.—Section 1854(f)(1) of such Act (42 
U.S.C. 1395w–24(f)(1)) is amended by adding 
at the end the following new sentence: ‘‘Such 
determination shall be made separately for ben-
efits under parts A and B and for prescription 
medicine benefits under part D.’’. 
(3) EXCLUSIONS FROM COVERAGE.— 
(A) APPLICATION
TO
PART
D.—Section 
1862(a) of the Social Security Act (42 U.S.C. 
1395y(a)) is amended in the matter preceding 
paragraph (1) by striking ‘‘part A or part B’’ 
and inserting ‘‘part A, B, or D’’. 
(B) PRESCRIPTION
MEDICINES
NOT
EX-
CLUDED FROM COVERAGE IF APPROPRIATELY 
PRESCRIBED.—Section 1862(a)(1) of such Act 
(42 U.S.C. 1395y(a)(1)) is amended— 
(i) in subparagraph (H), by striking 
‘‘and’’ at the end; 
(ii) in subparagraph (I), by striking 
the semicolon at the end and inserting ‘‘, 
and’’; and 
(iii) by adding at the end the fol-
lowing new subparagraph: 
‘‘(J) in the case of prescription medicines 
covered under part D, which are not prescribed 
in accordance with such part;’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall take effect on January 1, 2007, and the 
Secretary of Health and Human Services shall administer
the Social Security Act in accordance with such amend-
ments on and after such date. 
SEC. 5. SUBSTANTIAL REDUCTIONS IN THE PRICE OF PRE-
SCRIPTION DRUGS FOR MEDICARE BENE-
FICIARIES. 
(a) PARTICIPATING MANUFACTURERS.— 
(1) IN GENERAL.—Each participating manufac-
turer of a covered outpatient drug shall make avail-
able for purchase by each pharmacy such covered 
outpatient drug in the amount described in para-
graph (2) at the price described in paragraph (3). 
(2) DESCRIPTION OF AMOUNT OF DRUGS.—The 
amount of a covered outpatient drug that a partici-
pating manufacturer shall make available for pur-
chase by a pharmacy is an amount equal to the ag-
gregate amount of the covered outpatient drug sold 
or distributed by the pharmacy to medicare bene-
ficiaries. 
(3) DESCRIPTION
OF
PRICE.—The price at 
which a participating manufacturer shall make a 
covered outpatient drug available for purchase by a 
pharmacy is the price equal to the lowest of the fol-
lowing:
(A) The lowest price paid for the covered 
outpatient drug by any agency or department of 
the United States. 
(B) The manufacturer’s best price for the 
covered outpatient drug, as defined in section 
1927(c)(1)(C) of the Social Security Act (42 
U.S.C. 1396r–8(c)(1)(C)). 
(C) The lowest price at which the drug is 
available (as determined by the Secretary) 
through importation consistent with the provi-
sions of section 804 of the Federal Food, Drug, 
and Cosmetic Act. 
(b) SPECIAL PROVISION WITH RESPECT TO HOSPICE 
PROGRAMS.—For purposes of determining the amount of 
a covered outpatient drug that a participating manufac-
turer shall make available for purchase by a pharmacy 
under subsection (a), there shall be included in the cal-
culation of such amount the amount of the covered out-
patient drug sold or distributed by a pharmacy to a hos-
pice program. In calculating such amount, only amounts 
of the covered outpatient drug furnished to a medicare 
beneficiary enrolled in the hospice program shall be in-
cluded.
(c) ADMINISTRATION.—The Secretary shall issue 
such regulations as may be necessary to implement this 
section. 
(d) REPORTS TO CONGRESS REGARDING EFFECTIVE-
NESS OF SECTION.— 
(1) IN
GENERAL.—Not later than two years 
after the date of the enactment of this Act, and an-
nually thereafter, the Secretary shall report to Con-
gress regarding the effectiveness of this section in— 
(A) protecting medicare beneficiaries from 
discriminatory pricing by drug manufacturers; 
and 
(B) making prescription drugs available to 
medicare beneficiaries at substantially reduced 
prices. 
(2) CONSULTATION.—In preparing such re-
ports, the Secretary shall consult with public health 
experts, affected industries, organizations rep-
resenting consumers and older Americans, and other 
interested persons. 
(3) RECOMMENDATIONS.—The Secretary shall 
include in such reports any recommendations they 
consider appropriate for changes in this section to 
further reduce the cost of covered outpatient drugs 
to medicare beneficiaries.
(f) DEFINITIONS.—For purposes of this section: 
(1) 
PARTICIPATING
MANUFACTURER.—The 
term ‘‘participating manufacturer’’ means any man-
ufacturer of drugs or biologicals that, on or after the 
date of the enactment of this Act, enters into a con-
tract or agreement with the United States for the 
sale or distribution of covered outpatient drugs to 
the United States. 
(2) COVERED OUTPATIENT DRUG.—The term 
‘‘covered outpatient drug’’ has the meaning given 
that term in section 1927(k)(2) of the Social Secu-
rity Act (42 U.S.C. 1396r–8(k)(2)). 
(3) 
MEDICARE
BENEFICIARY.—The 
term 
‘‘medicare beneficiary’’ means an individual entitled 
to benefits under part A of title XVIII of the Social 
Security Act or enrolled under part B of such title, 
or both. 
(4) HOSPICE
PROGRAM.—The term ‘‘hospice 
program’’ has the meaning given that term under 
section 1861(dd)(2) of the Social Security Act (42 
U.S.C. 1395x(dd)(2)). 
(5) SECRETARY.—The term ‘‘Secretary’’ means 
the Secretary of Health and Human Services. 
(f) EFFECTIVE DATE.—This section shall take effect 
on January 1, 2007, and the Secretary shall implement
this section in a manner consistent with the obligations 
of the United States. 
SEC. 6. IMPORTATION OF CERTAIN PRESCRIPTION DRUGS. 
(a) REPEAL OF CERTAIN SECTION REGARDING IM-
PORTATION OF PRESCRIPTION DRUGS.—Chapter VIII of 
the Federal Food, Drug, and Cosmetic Act (21 U.S.C. 381 
et seq.) is amended by striking section 804. 
(b) IMPORTATION OF PRESCRIPTION DRUGS; WAIVER 
OF CERTAIN IMPORT RESTRICTIONS.— 
(1) IN GENERAL.—Chapter VIII of the Federal 
Food, Drug, and Cosmetic Act (21 U.S.C. 381 et 
seq.), as amended by section 3, is further amended 
by inserting after section 803 the following: 
‘‘SEC. 804. COMMERCIAL AND PERSONAL IMPORTATION OF 
PRESCRIPTION DRUGS. 
‘‘(a) IMPORTATION OF PRESCRIPTION DRUGS.— 
‘‘(1) IN GENERAL.—In the case of qualifying 
drugs imported or offered for import into the United 
States from registered exporters or by registered im-
porters— 
‘‘(A) the limitation on importation that is 
established in section 801(d)(1) is waived; and 
‘‘(B) the standards referred to in section 
801(a) regarding admission of the drugs are 
subject to subsection (g) of this section (includ-
ing with respect to qualifying drugs to which 
section 801(d)(1) does not apply). 
‘‘(2) IMPORTERS.—A qualifying drug may not 
be imported under paragraph (1) unless— 
‘‘(A) the drug is imported by a pharmacy, 
group of pharmacies, or a wholesaler that is a 
registered importer; or 
‘‘(B) the drug is imported by an individual 
for personal use or for the use of a family mem-
ber of the individual (not for resale) from a reg-
istered exporter. 
‘‘(3) RULE
OF
CONSTRUCTION.—This section 
shall apply only with respect to a drug that is im-
ported or offered for import into the United 
States— 
‘‘(A) by a registered importer; or 
‘‘(B) from a registered exporter to an indi-
vidual. 
‘‘(4) DEFINITIONS.— 
‘‘(A) 
REGISTERED
EXPORTER; 
REG-
ISTERED IMPORTER.—For purposes of this sec-
tion: 
‘‘(i) The term ‘registered exporter’ 
means an exporter for which a registration
under subsection (b) has been approved 
and is in effect. 
‘‘(ii) The term ‘registered importer’ 
means a pharmacy, group of pharmacies, 
or a wholesaler for which a registration 
under subsection (b) has been approved 
and is in effect. 
‘‘(iii) The term ‘registration condition’ 
means a condition that must exist for a 
registration under subsection (b) to be ap-
proved. 
‘‘(B) QUALIFYING DRUG.—For purposes of 
this section, the term ‘qualifying drug’ means a 
drug for which there is a corresponding U.S. 
label drug. 
‘‘(C) U.S. LABEL DRUG.—For purposes of 
this section, the term ‘U.S. label drug’ means 
a prescription drug that— 
‘‘(i) with respect to a qualifying drug, 
has the same active ingredient or ingredi-
ents, route of administration, dosage form, 
and strength as the qualifying drug; 
‘‘(ii) with respect to the qualifying 
drug, is manufactured by or for the person 
that manufactures the qualifying drug;
‘‘(iii) 
is 
approved 
under 
section 
505(c); and 
‘‘(iv) is not— 
‘‘(I) a controlled substance, as 
defined in section 102 of the Con-
trolled Substances Act (21 U.S.C. 
802); 
‘‘(II) a biological product, as de-
fined in section 351 of the Public 
Health Service Act (42 U.S.C. 262), 
including— 
‘‘(aa) a therapeutic DNA 
plasmid product; 
‘‘(bb) a therapeutic synthetic 
peptide product; 
‘‘(cc) a monoclonal antibody 
product for in vivo use; and 
‘‘(dd) a therapeutic recom-
binant DNA-derived product; 
‘‘(III) an infused drug, including 
a peritoneal dialysis solution; 
‘‘(IV) an injected drug; 
‘‘(V) a drug that is inhaled dur-
ing surgery; or