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. 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. 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. CMS oversees the provision of discounts by plan sponsors to eligible beneficiaries who reach the coverage gap, and ensures that the discounts are paid for by drug manufacturers. CMS oversight activities include performing checks of prescription drug data to verify that plan sponsors provide accurate discounts at the point-of-sale to eligible beneficiaries who reach the coverage gap. CMS also tracks the payment of discounts by drug manufacturers to plan sponsors and has implemented a dispute resolution process to resolve manufacturer disputes about discounts. In addition, CMS performs other activities, such as monitoring beneficiary complaints, and has reported on certain Discount Program outcomes. CMS performs 15 automated checks of PDE data specific to the Discount Program that verify whether plan sponsors have provided and accurately calculated discounts at the point-of-sale to eligible beneficiaries who reach the coverage gap. 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. 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). 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. Plan sponsors, PBMs, and drug manufacturers we spoke with had different perspectives on aspects of the drug pricing and plan design effects of the Discount Program, which include drug prices, rebates, formularies, plan benefit design, and utilization management practices. Most plan sponsors and PBMs told us they believe the Discount Program may have been a factor in the rising prices of some brand-name drugs, while most manufacturers told us the Discount Program has not affected the prices of brand-name drugs they negotiate with sponsors and PBMs. The three PBMs we interviewed also told us they observed that some manufacturers decreased the amount of rebates for the brand-name drugs they offered, which they believe occurred as a result of the Discount Program. In comparison, most of the plan sponsors did not observe manufacturers decrease rebate amounts and most manufacturers reported no effects on their rebate negotiations as a result of the Discount Program. Most plan sponsors and PBMs also reported that the Discount Program did not affect their Part D plan formularies, plan benefit design, or utilization management practices. Six of the seven plan sponsors and two of the three PBMs we interviewed told us they believe the Discount Program may have been a contributing factor in the rising prices of brand-name drugs by some manufacturers.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. 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. 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. 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. HHS reviewed a draft of this report and in its written comments noted that our finding on the perspectives of stakeholders (Medicare Part D plan sponsors, drug manufacturers, and PBMs) on the effects of the Discount Program is consistent with HHS’s expectations and experience. HHS commented that our finding on price changes before and after implementation of the Discount Program for brand-name drugs used by Medicare Part D beneficiaries who did and did not reach the coverage gap is also consistent with HHS’s expectations and experience. HHS further noted that our finding on brand-name drug price changes is similar to the results of CMS’s own analysis of drug price data, which used a different methodology. HHS commented that CMS will continue to monitor the Discount Program to ensure that discounts on brand-name drugs are applied accurately and in a timely manner for Medicare Part D beneficiaries. In addition, HHS noted that CMS will continue to monitor Part D drug prices as well as the impact of drug prices on the Medicare Part D program. HHS’s comments are printed in appendix IV. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the Secretary of Health and Human Services and interested congressional committees. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff have questions about this report, please contact John E. Dicken at (202) 512-7114 or DickenJ@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff members who made key contributions to this report are listed in appendix V. 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. 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. 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. 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. 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.

Summary: 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. 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.