Medicare Part D Coverage Gap: Discount Program Effects and Brand-Name Drug Price Trends
Published: 2012-09-28T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: 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 brand-name 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.
section_title: What GAO Found
paragraphs: 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 brand-name 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.

section_title: Letter
paragraphs: 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.
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 sponsors negotiate for brand-name  drugs when beneficiaries reach the coverage gap. 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.
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.
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  brand-name drugs to eligible beneficiaries in the coverage gap.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.
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. 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 brand- name drugs accounted for the highest total drug expenditures used by  non-LIS Medicare Part D beneficiaries in the coverage gap in 2011. 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.
To identify the plan sponsors, we excluded plans with restricted enrollment, including  employer-sponsored, Demonstration, and Programs of All-Inclusive Care for the Elderly.
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 high- expenditure brand-name drugs used by non-LIS beneficiaries while in the  coverage gap in 2011 and the second basket included 78 high- expenditure brand-name drugs used by non-LIS beneficiaries who did not  reach the coverage gap in 2011. 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. 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.)
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  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.
subsections: section_title: Background
subsections: section_title: Medicare Part D Enrollment and Spending
paragraphs: 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). 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).
In 2011, federal spending on Part D totaled approximately $67 billion,  accounting for about 12 percent of total Medicare expenditures.  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.
To help keep Part D spending down, CMS relies on  competing plan sponsors to negotiate drug prices for the beneficiaries in  their plans. 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.  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.
section_title: Medicare Part D Benefit and Plan Design
paragraphs: 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. 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.
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 non- LIS 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. 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.
In 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. drug. 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. 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.
section_title: Medicare Part D Coverage Gap Discount Program
paragraphs: 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   Beneficiaries that are enrolled  the initial coverage limit during the year.in enhanced plans providing some coverage for brand-name drugs when  they reach the coverage gap may also receive the discount after  supplemental benefits are applied. 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 plan- negotiated price for brand-name drugs at the point-of-sale when non-LIS  beneficiaries reach the coverage gap. 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. 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.)
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. Specifically, beginning in 2013, Medicare will pay   2.5 percent of the plan-negotiated price for brand-name drugs. 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  reached the coverage gap. Medicare will increase its subsidy to   75 percent for generic drugs by 2020. 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. 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.
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.
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  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. 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.
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.
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.
section_title: CMS Oversees Coverage Gap Discounts Provided by Plan Sponsors and Paid for by Manufacturers
paragraphs: 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.
subsections: section_title: CMS Checks Prescription Drug Data to Verify That Plan Sponsors Provide Accurate Discounts to Eligible Beneficiaries
paragraphs: 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. 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.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.
CMS officials told us that an additional use of the PDE data  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. 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.
section_title: CMS Tracks Discount Payments by Manufacturers and Has a Process to Resolve Payment Disputes
paragraphs: 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.  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. CMS officials told us a few  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.have not imposed any penalties on manufacturers as of July 2012.
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. 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. 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.
In 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).
section_title: CMS Performs Other Oversight Activities and Reports on Certain Discount Program Outcomes
paragraphs: 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. CMS checks that manufacturers that  participate in the Discount Program are providing discounts on brand- name 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  information from these claims, such as the identity of the pharmacy, may  be used to identify beneficiaries. 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.
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. CMS officials told us they also  monitor Medicare Part D brand-name drug prices annually. 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. 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.
section_title: Plan Sponsors, PBMs, and Manufacturers Had Different Perspectives on Aspects of the Drug Pricing and Plan Design Effects of the Discount Program
paragraphs: 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.
subsections: section_title: 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
paragraphs: 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.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.
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.
section_title: PBMs, Plan Sponsors, and Manufacturers Had Different Observations on the Effects on Rebates as a Result of the Discount Program
paragraphs: The three PBMs we interviewed told us they observed that some drug  manufacturers decreased the amount of rebates they offered for brand- name drugs, which they believe occurred as a result of the Discount  Program. 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.
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.
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.
section_title: Most Plan Sponsors and PBMs Reported That the Discount Program Did Not Affect Formularies, Plan Benefit Design, or Utilization Management Practices
paragraphs: 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. 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.  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.  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  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.
section_title: 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
paragraphs: 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. 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). 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.  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.
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). For example, from December 2009 through December 2010 the  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 brand- name 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.
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-of- pocket spending for some beneficiaries in the coverage gap as well as  increase overall Part D spending. Thus, continued monitoring of brand- name drug prices and manufacturer rebates will be important as the  Discount Program matures.
section_title: Agency Comments
paragraphs: 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.
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section_title: Appendix I: Methodology for Examining Brand-Name Drug Price Trends
paragraphs: 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. 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).
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  PDPs and MA-PDPs who did not reach the coverage gap in 2011. We  identified the top 100 brand-name drugs for each basket by using the  nine-digit national drug code (NDC-9). 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. 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. 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.expenditure 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   After identifying the top 100 high- 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).
To analyze Medicare Part D price trends for the two baskets of brand- name 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.  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. 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-of- sale. We performed several data edits involving the quantity dispensed  and ingredient cost per unit variables to further improve data reliability.
We then trimmed the data to remove outliers.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.
To weight the baskets, we  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. 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 non- specialty-tier-eligible drugs. We considered specialty-tier-eligible drugs  to be those drugs with a median cost that exceeded $600 for a 30-day  supply in 2011 (see app. II for a list of the brand-name drugs considered  specialty-tier-eligible).
While 50 brand-name drugs overlapped the two baskets, each of these drugs had a  different weight depending on their relative utilization in each basket.
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.
section_title: Appendix II: Brand-Name Drugs Included in Price Trend Analyses
paragraphs: 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.
section_title: Appendix III: How the Discount Program Works at the Point-of-Sale for Brand-Name Drugs
paragraphs: 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. 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.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.
section_title: Appendix IV: Comments from the Department of Health and Human Services
section_title: Appendix V: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: 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.
section_title: Related GAO Products
paragraphs: 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 Cost- Containment 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.
Prescription Drugs: Price Trends for Frequently Used Brand and Generic  Drugs from 2000 through 2004. GAO-05-779. Washington, D.C.:   August 15, 2005.