DOD, Medicaid, and Medicare Part D use different methods to pay for prescription drugs dispensed in retail pharmacies based on program design differences and statutory requirements. Specifically, DOD reimburses retail pharmacies directly for drugs dispensed to its beneficiaries, state Medicaid programs reimburse pharmacies and then receive federal matching funds for a portion of these expenditures, and Medicare Part D pays pharmacies indirectly through plan sponsors. Under the Medicare Part D program, beneficiaries may choose from competing prescription drug plans offered by plan sponsors (primarily private health insurers), and those plan sponsors are responsible for paying pharmacies. In addition, DOD and Medicaid are statutorily entitled to certain refunds or rebates from drug manufacturers for drugs dispensed to their beneficiaries, while Medicare Part D plan sponsors negotiate with manufacturers for rebates and other price concessions. In fiscal year 2011, DOD provided prescription drug coverage to about 9.7 million beneficiaries through retail pharmacies, its military treatment facilities, and its mail order pharmacy. Active duty service members (including activated National Guard and Reserve members) are not charged for covered prescriptions. For all other beneficiaries, the beneficiary-paid amount (i.e., the amount they pay to the pharmacy when filling a prescription) varies based on the type of medication and where the prescription is filled. For certain drugs dispensed to beneficiaries at retail pharmacies after January 28, 2008, DOD is statutorily entitled to pay the federal ceiling price (FCP), which also pertains to its directly-purchased drugs. In practice, DOD obtains these prices through post-purchase refunds paid by the manufacturers of certain drugs—primarily brand-name drugs. In fiscal year 2011, DOD’s prescription drug spending totaled about $7.48 billion, according to DOD officials, representing about 8.9 percent of federal spending for prescription drugs. In fiscal year 2011, Medicaid provided prescription drug coverage to about 71.5 million low income beneficiaries. Prescription drug coverage is an optional benefit under federal Medicaid law that all states and the District of Columbia provide. States establish and administer their own Medicaid programs within broad federal guidelines. Thus, Medicaid programs vary from state to state. Most states require a nominal beneficiary copayment for prescription drugs. State Medicaid programs reimburse retail pharmacies for drugs dispensed to Medicaid beneficiaries and then report these payments to CMS. The federal government provides matching funds to state programs to cover a portion of these costs. Federal law requires manufacturers to pay rebates to state Medicaid agencies for drugs dispensed to Medicaid beneficiaries. These statutorily mandated rebates are calculated based on two prices manufacturers must report to CMS—the average manufacturer price (AMP) and the “best price.” For brand-name drugs: the rebate equals the greater of 23.1 percent of the AMP or the difference between the AMP and the best price. If the AMP rises faster than inflation as measured by the change in the consumer price index, the manufacturer is required to provide an additional rebate to the state Medicaid program. The rebate is capped at 100 percent of AMP. For generic drugs: the rebate equals 13 percent of AMP. Best price is not a factor and there are no additional rebates or caps. In addition, most state Medicaid programs negotiate additional rebates— known as state supplemental rebates—from drug manufacturers. In fiscal year 2011, total federal and state Medicaid net spending on prescription The federal share was $8.6 billion, accounting drugs was $13.7 billion.for about 10.3 percent of federal drug expenditures. In 2011, about 33.2 million Medicare beneficiaries were enrolled in the Medicare Part D program. Medicare beneficiaries can obtain coverage for outpatient prescription drugs by choosing from multiple competing plans offered by plan sponsors—primarily private health insurers—that contract with CMS to offer the prescription drug benefit. The plan sponsors are responsible for reimbursing retail pharmacies for drugs dispensed to Medicare Part D beneficiaries. Drug plans may differ in the premiums charged to CMS and beneficiaries; beneficiary deductibles and copayments (i.e., beneficiary-paid amounts); the drugs covered; pharmacies available to beneficiaries for filling prescriptions; and the drug prices, rebates, and other price concessions negotiated with manufacturers and pharmacies. Although Medicare Part D plans can design their own formularies, CMS generally requires that each formulary include at least two drugs within each therapeutic class and has also designated six categories of clinical concern for which plans must cover all or substantially all of the drugs. As we previously reported, plan sponsors have indicated that these formulary requirements limit their ability to negotiate lower prices for some drugs. Medicare Part D beneficiaries fill prescriptions at retail or mail order pharmacies affiliated with their plans; these pharmacies then submit claims to the plan sponsors for reimbursement. Plan sponsors often negotiate point-of-sale and post-purchase rebates and other price concessions with manufacturers and pharmacies; these must be reported to CMS each year at the national drug code (NDC) level in the DIR reports. In 2011, federal spending on Medicare Part D totaled approximately $55.2 billion, accounting for about 65.9 percent of total federal drug expenditures. Medicaid paid a lower average net unit price—that is, the price after subtracting any beneficiary-paid amounts and post-purchase price adjustments—than DOD and Medicare Part D across the entire sample of 78 prescription drugs and the subsets of brand-name and generic drugs. Specifically, Medicaid’s average net price for the entire sample was $0.62 per unit, while Medicare Part D paid an estimated 32 percent more ($0.82 per unit) and DOD paid 60 percent more ($0.99 per unit). (See fig. 1.) Similarly, Medicaid’s average net price for the subset of brand- name drugs in our sample was $1.57 per unit, the lowest among the three programs, while DOD paid 34 percent more ($2.11 per unit), and Medicare Part D paid an estimated 69 percent more ($2.65 per unit). Medicaid also paid the lowest net price for the subset of generic drugs in our sample ($0.28 per unit), while Medicare Part D paid 4 percent more ($0.29 per unit) and DOD paid 50 percent more ($0.42 per unit). When we examined the net prices that each program paid for the individual drugs in the sample after subtracting all reported beneficiary- paid amounts and post-purchase price adjustments, we found that Medicaid paid the lowest prices for 25 brand-name and 3 generic drugs, while DOD paid the lowest net price for 5 brand-name and 22 generic drugs, and Medicare Part D paid the lowest estimated net price for 3 brand-name and 20 generic drugs. We found that multiple factors affected the net prices paid by each program, including the amount of post-purchase price adjustments each program received, the gross prices paid to pharmacies, the beneficiary- paid amounts, and market dynamics. Of these, a key factor for the entire sample and for the brand-name subset was the amount of manufacturer post-purchase price adjustments received. (See fig. 2.) On average across the entire sample, these price adjustments ranged from about 15 percent of the gross price for Medicare Part D to about 31 percent for DOD, and nearly 53 percent for Medicaid. For the brand-name subset of the sample, these rebates ranged from about 19 percent of the gross price for Medicare Part D to nearly 39 percent for DOD and 62 percent for Medicaid. The statutory framework allowing each program to obtain post-purchase price adjustments contributes to the wide range of percentages observed. Medicaid’s federally mandated rebates apply to virtually all drugs, while DOD’s refunds only apply to certain drugs (i.e., primarily brand-name drugs). Furthermore, we found that even when DOD received a refund for a given drug, DOD’s per-unit refund amount was less than Medicaid’s per-unit rebate for most of the drugs in our sample even though we applied only the federally mandated (i.e., URA-based) rebates for the calculation of Medicaid net prices. If we had been able to accurately apply the Medicaid state supplemental rebates, the per-unit Medicaid rebate amounts would be even larger (i.e., a greater percentage of the gross unit price) than we report. Finally, we found that Medicare Part D obtained the lowest per-unit price adjustments among the three programs. In contrast to the statutory authority allowing DOD and Medicaid to collect specific refunds and rebates, Medicare Part D plan sponsors rely on independent negotiations to obtain price concessions from drug manufacturers. As we have previously reported, plan sponsors have noted limitations on their ability to negotiate price concessions for some drugs due to formulary requirements set by CMS, lack of competitors for some drugs, or low utilization for some drugs that limit incentives for manufacturers to provide price concessions. The gross unit prices paid to retail pharmacies by each program and the magnitude of beneficiary-paid amounts also contributed to the differences in net prices, although to a lesser degree than post-purchase price adjustments. As shown in figure 2, each of the three programs paid the lowest gross unit price to pharmacies for one of the groups of sample drugs: Medicare Part D for the sample as a whole, DOD for the subset of brand-name drugs, and Medicaid for the subset of generic drugs. These different gross unit prices act as a “starting point” for determining net prices paid by the programs—a lower gross price negotiated between the program and the pharmacy makes it easier for the program to achieve a lower net unit price after accounting for beneficiary-paid amounts and post-purchase price adjustments. Beneficiary-paid amounts also affected the net prices paid by each program; larger beneficiary payments contributed to lower net prices paid by the agency. The average beneficiary-paid amounts varied across the three programs; for example, on average for all 78 drugs in our sample, beneficiaries paid nearly 19 percent—or $0.23—of Medicare Part D’s gross price per unit, while DOD beneficiaries paid about 7 percent—or $0.12—of DOD’s average gross price per unit. Beneficiary-paid amounts also varied depending on the category of drugs examined. For the subset of brand-name drugs in our sample, beneficiary-paid amounts ranged from 6 percent of the gross price for DOD to 17 percent for Medicare Part D, while for the subset of generic drugs these amounts ranged from 14 percent of the gross price for DOD to 21 percent for Medicare Part D. Market dynamics—such as manufacturer responses to offset discounts, the number of competitors for a given drug, and varying utilization of specific drugs by different programs—can also affect the net prices paid by these and other drug programs and thus the amount of savings the programs might be able to achieve. For example, the DOD, Medicaid, and Medicare Part D drug programs theoretically could have achieved savings had they been able to pay the lowest price for each of the drugs in our sample through having access to the post-purchase price adjustments available to the program with the lowest net price for each drug. However, market dynamics, such as manufacturer responses, likely would offset at least some of the savings. Previous reports by GAO and the Congressional Budget Office have noted that making rebates or other discounts available to federal programs could provide savings for the newly eligible programs but could result in higher prices for other programs—including those already eligible for the discounts—as drug manufacturers respond by raising their prices to offset the change. The magnitude of these potential offsetting price increases could depend on a number of factors. For example, if a large federal program with many beneficiaries became eligible for the discounts, manufacturers might choose to raise prices by a greater amount than they would if a smaller program with fewer beneficiaries became eligible. Manufacturers might choose to raise prices more for drugs with fewer competitors than for drugs with many competitors. Furthermore, because federal prices are generally based on prices paid by nonfederal purchasers such as private health insurers, manufacturers would have to raise prices to those purchasers in order to raise the federal prices. The magnitude of these potential effects would vary by drug and would depend on a number of factors, including the relationship between the specific federal price extended to newly eligible programs and the price paid by nonfederal purchasers. Other factors that may affect the magnitude of savings, if any, which could be achieved by DOD, Medicaid, and Medicare Part D include differences between the programs with regard to: programs’ formulary practices—for example, in exchange for price concessions, a program may offer a reduced copayment or preferred placement of a manufacturer’s drug in the formulary to encourage beneficiaries to choose that drug rather than a similar alternative. In addition, programs may differ in their ability to exclude certain drugs from their formularies, which can limit their ability to negotiate; for example, DOD officials told us that they must cover all drugs within a class. number of beneficiaries enrolled—that is, a program or plan with more beneficiaries can generally negotiate lower gross prices with pharmacies and more rebates from manufacturers through offering greater anticipated utilization of drugs than a program with fewer beneficiaries. utilization practices based on differences in beneficiary populations—for example, Medicare Part D’s predominantly elderly population is likely to use a different mix of drugs than a program such as Medicaid, which serves a younger population, and these utilization differences can affect each program’s ability to obtain discounts on certain drugs based on volume. copayment structure—for example, one program may achieve lower net prices on certain drugs by charging beneficiaries a higher copayment for the drug. type of pharmacy—for example, the Medicare Part D net prices we are reporting include data from prescriptions filled at mail order pharmacies used by the plans, which typically charge the plans less overhead than retail store-based pharmacies, while DOD prices are limited to prescriptions filled at store-based pharmacies; if the mail order prescriptions were excluded, the average Medicare Part D prices would likely be higher than those we report. We provided a copy of the draft report to DOD and the Department of Health and Human Services (HHS) for comment. DOD stated that it had no comments. HHS provided a technical comment, which was incorporated. We will send copies of this report to relevant congressional committees and other interested members. The report also will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions regarding this report, please contact me 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 II. In this appendix we describe our data sources, the selection of the drug sample, and calculations of gross and net unit prices paid by the Department of Defense (DOD), Medicaid, and Medicare Part D for prescription drugs dispensed to their beneficiaries at retail pharmacies. We obtained prescription drug claims data from DOD and the Centers for Medicare & Medicaid Services (CMS) for the third calendar quarter of 2010. Specifically, we obtained Pharmacy Data Transaction Service (PDTS) data from DOD covering prescription drugs dispensed to its beneficiaries by non-DOD retail pharmacies and we obtained Medicaid Analytic eXtract (MAX) data and Medicare Part D Prescription Drug Event (PDE) claims data from CMS. For each data source, we excluded claims with third-party payments; we also excluded physician-administered outpatient prescription drugs and items that are not traditionally considered drugs such as bandages, syringes, needles, diabetes test For Medicaid, we excluded Arizona and Delaware strips, and saline.because claims from those states did not include third-party payment data. We included only fee-for-service Medicaid claims because claims paid under a capitated managed care plan or similar methods would not provide an accurate picture of drug prices actually paid. We also excluded Medicaid claims for beneficiaries who were also eligible for Medicare because retail prescription drugs for those beneficiaries are covered by Medicare Part D. We excluded Medicare Part D claims from plans that restrict enrollment, such as employer plans, Program of All- Inclusive Care for the Elderly (PACE) plans, and demonstration plans. We used Red Book data from Truven Health Analytics to determine the brand-name or generic status of each drug. We reviewed agency data for reasonableness and consistency, including screening for outlier prices and examining possible reasons for inconsistencies between the data sources. We also reviewed documentation and talked to agency officials about steps they take to ensure data reliability. We determined that the data were sufficiently reliable for our purposes. We determined utilization using units of each (for drugs measured in discrete units such as tablets, capsules, vials, or kits), milliliters (for drugs measured in liquid volume), and grams (for drugs measured by weight). When calculating expenditures, we used the sum of the programs’ payments for each drug plus any reported beneficiary-paid amounts (e.g., deductibles and copayments). Cleaned and validated Medicaid data for 2010 were not available at the time that we selected our sample. Therefore, we used only DOD and Medicare Part D data to select our sample. However, such data became available later and we were able to use these data to determine Medicaid gross and net unit prices. To select the highest utilization and highest expenditure drugs for the sample, we aggregated the utilization and expenditure data at the drug level (i.e., drug name, strength, and dosage form) separately for DOD and Medicare Part D. For example, all national drug codes (NDC) corresponding to 10 mg tablets of Lipitor reimbursed by DOD on behalf of its beneficiaries were aggregated and the associated utilization and expenditures were summed and compared to other brand-name drugs, while NDCs corresponding to 10 mg tablets of atorvastatin (the generic equivalent of Lipitor) reimbursed by DOD were aggregated separately and compared to other generic drugs. Because we encountered difficulty in identifying and removing outliers from the Medicare Part D PDE data due to issues with the reliability of the “Quantity Dispensed” field, we narrowed the drugs considered for inclusion in the sample by first using DOD utilization and expenditure data to rank the top 150 brand-name and top 150 generic drugs in each category (high utilization and high expenditure). We were then able to clean the data by identifying and removing outliers from the much smaller subset of PDE claims corresponding to these drugs. We ranked the brand-name and generic drugs based on utilization and expenditures for Medicare Part D. We then combined the DOD and Medicare Part D rankings to determine the top brand-name and generic drugs that were reimbursed by both agencies. The drug sample was selected to include the top 50 brand-name and top 50 generic drugs; 25 of the brand-name drugs and 25 of the generic drugs were selected on the basis of the combined DOD and Medicare Part D utilization ranks, and the other 25 brand-name and 25 generic drugs were selected on the basis of the combined DOD and Medicare Part D expenditure ranks. After accounting for drugs that were in both the high-expenditure group and the high-utilization group, the final sample contained 33 brand-name drugs and 45 generic drugs and accounted for at least 25 percent of utilization and 25 percent of expenditures for both DOD and Medicare Part D retail prescriptions filled by beneficiaries in the third calendar quarter of 2010 (see table 1). (See table 2 for a list of the drugs in the sample.) After selecting the sample, we calculated gross unit prices paid to pharmacies by DOD, Medicaid, Medicare Part D, and their beneficiaries for all individual drugs. We calculated gross unit prices by first adding the program-paid and beneficiary-paid amounts for each drug, then dividing these expenditures by total utilization. For Medicaid, we were unable to include beneficiary-paid amounts because CMS does not collect these data. Therefore the Medicaid gross prices we report are somewhat lower than the actual gross prices would have been had beneficiary-paid amounts been included. However, beneficiary-paid amounts for Medicaid are generally nominal and it is likely that they would be smaller than corresponding amounts for DOD and Medicare Part D. We also calculated gross unit prices for the entire sample, the subset of brand- name drugs, and the subset of generic drugs by dividing the total expenditures for all relevant drugs by the total utilization for those drugs. All three programs (DOD, Medicaid, and Medicare Part D) obtain refunds, rebates, or other price concessions from drug manufacturers for at least some drugs dispensed to their beneficiaries by retail pharmacies. In order to more accurately calculate reimbursement prices paid to pharmacies by each program, we accounted for these post-purchase price adjustments by calculating program-paid net unit prices. To calculate these prices for DOD, we obtained post-purchase refund data from DOD for prescription drugs dispensed to its beneficiaries at non-DOD retail pharmacies.These refunds were subtracted from the NDC-level gross unit prices to determine net unit prices paid by DOD for each NDC. We then aggregated these net NDC-level prices as appropriate to determine average net unit prices for each individual drug in our sample, for the entire sample, for the subset of brand-name drugs, and for the subset of generic drugs. Manufacturers are required to provide rebates (which are calculated on the basis of URA data) to state Medicaid agencies for covered drugs. See 42 U.S.C. § 1396r-8. States may also negotiate supplemental rebates directly with manufacturers for drugs dispensed to Medicaid recipients. These supplemental rebates are reported in Form CMS-64, a standardized quarterly expenditure report that states submit to CMS documenting payments and rebates or offsets in various medical categories, including prescription drugs, to obtain federal matching funds to which states are entitled. each individual drug in our sample, for the entire sample, for the subset of brand-name drugs, and for the subset of generic drugs. For Medicare Part D, plan sponsors may negotiate rebates and other price concessions from manufacturers for drugs dispensed to their beneficiaries. Beginning in 2010, the annual total of all such price concessions at the NDC level must be reported to CMS on the annual Medicare Part D Direct and Indirect Remuneration (DIR) Detailed Report. However, because plan sponsors have several options for allocating DIR to the NDC level, calculation of the net drug price using the NDC-level DIR data provides only an estimate of the net prices paid by plan sponsors. We also evaluated the impact of point-of-sale (POS) rebates as reported in the PDE data to our calculation of net prices for Medicare Part D and determined that POS rebates were insignificant in comparison to DIR amounts; we therefore ignored POS rebates in our calculation of net prices. To estimate program-paid net prices for Medicare Part D, we obtained the 2010 DIR Detailed Report from CMS. To calculate the total DIR for each NDC, we added the “rebate” and “all_other_dir” variables. Because the DIR report includes annual—rather than quarterly—data on price concessions, we estimated the proportion of Medicare Part D price concessions applicable to our sample by determining the proportion of 2010 expenditures that occurred in the third calendar quarter for each NDC in our sample. We multiplied this result by the total amount of price concessions reported in the 2010 DIR Detailed Report for a given NDC to estimate the proportion of each NDC’s DIR (in dollars) to apply to our analysis. We divided this result by the NDC-level utilization and subtracted the resulting per-unit price concession amount from the Medicare Part D gross unit price for that NDC. We then aggregated the results for the appropriate NDCs to determine average net unit prices for the entire sample, the subset of brand-name drugs, and the subset of generic drugs. We interviewed DOD and CMS officials and reviewed literature describing factors that affect drug prices. The results of our analyses are limited to the 78 high-utilization and high-expenditure drugs in our sample for the third calendar quarter of 2010 and are not necessarily applicable across all drugs or any other time periods. In addition to the contact named above, key contributors to this report were Robert Copeland, Assistant Director; Zhi Boon; Karen Howard; Laurie Pachter; and Carmen Rivera-Lowitt.

Summary: In 2011, federal spending for prescription drugs by DOD, Medicaid, and Medicare Part D totaled $71.2 billion—representing about 85 percent of all federal prescription drug expenditures—for about 114.4 million beneficiaries. Each program reimbursed retail pharmacies for outpatient prescriptions filled at these pharmacies by their beneficiaries. GAO was asked to compare prices paid for prescription drugs across federal programs. This report compares retail reimbursement prices paid by DOD, Medicaid, and Medicare Part D for a sample of prescription drugs and describes factors affecting these prices. Using agency data for the third quarter of 2010 (the most recent data available at the time of GAO's analysis), GAO selected a sample of 50 high-utilization and 50 high-expenditure drugs; after accounting for overlap between the two groups, the final sample contained 78 drugs. GAO calculated average gross unit prices paid to pharmacies by each program by adding total program-paid and beneficiary-paid amounts and dividing by total utilization for each drug, the entire sample, and the subsets of brand-name and generic drugs. GAO calculated net unit prices paid by each program by subtracting all agency-reported beneficiary-paid amounts, rebates, refunds, and other price concessions from the gross unit prices. GAO also interviewed DOD, Medicaid, and Medicare Part D officials and reviewed literature describing factors affecting drug prices. GAO found that Medicaid paid the lowest average net prices across a sample of 78 high-utilization and high-expenditure brand-name and generic drugs when compared to prices paid by the Department of Defense (DOD) and Medicare Part D. Specifically, Medicaid's average net price for the entire sample was $0.62 per unit, while Medicare Part D paid an estimated 32 percent more ($0.82 per unit) and DOD paid 60 percent more ($0.99 per unit). Similarly, Medicaid paid the lowest net price for the subset of brand-name drugs in the sample, while DOD paid 34 percent more and Medicare Part D paid an estimated 69 percent more. Medicaid also paid the lowest net price for the subset of generic drugs, while Medicare Part D paid 4 percent more and DOD paid 50 percent more. GAO found that multiple factors affected the net prices paid by each program. Specifically, a key factor for the entire sample and the brand-name subset was the amount of any post-purchase price adjustments, which are the refunds, rebates, or price concessions received by each program from drug manufacturers after drugs have been dispensed to program beneficiaries. These price adjustments ranged from about 15 percent of the gross price for Medicare Part D to about 31 percent for DOD, and nearly 53 percent for Medicaid across the entire sample. The gross prices each program negotiated with pharmacies and the magnitude of beneficiary-paid amounts also contributed to differences in net prices paid by the three programs, but to a lesser degree. GAO provided a copy of the draft report to DOD and the Department of Health and Human Services (HHS) for comment. DOD stated that it had no comments. HHS provided a technical comment, which was incorporated.