One of the motivating factors for Congress to create Medicare Part D in the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) ( P.L. 108-173 ) was seniors' rising out-of-pocket drug costs. Prior to MMA, 38% of Medicare beneficiaries did not have drug insurance coverage. People without sufficient drug insurance were paying drug prices that were 15% higher on average than the prices paid by insurance companies. Some Medicare beneficiaries who did not have drug insurance coverage coped with these higher prices by filling fewer of their prescriptions and taking medications less frequently than their doctors recommended. Medicare Part D provides voluntary insurance coverage of drugs for beneficiaries, albeit at a high price to the federal government. The federal cost of Part D benefits is estimated to be $44.7 billion in 2007. Medicare Part D was designed to take advantage of market competition. In accordance with market competition principles, the drug plans that administer the drug benefit are private and public (i.e., non-government) corporations who may rely on price negotiating, rebate negotiation, and price-volume discounts as a way to affect prices. A provision in the MMA, termed the "noninterference" provision, prevents the federal government from being a third party in drug price negotiations between the Part D drug plans and pharmaceutical manufacturers. Both the incoming Speaker of the House and incoming Senate Majority Leader have reportedly expressed their support for repealing this "noninterference" provision, and regard it as a priority for consideration in the 110 th Congress. According to one poll, the overwhelming majority (85%) of Americans also seem to support repealing the provision and allowing the government to negotiate prices. Should the "noninterference" provision be repealed, Congress may wish to provide guidance on how the Secretary of Health and Human Services (HHS) would negotiate prices. A debate could occur about the options and mechanisms of a new drug pricing policy for the Medicare drug plan. In order to clarify and inform the debate, this report provides an overview of the policies used in other nations. This report first provides a brief background of the way pharmaceutical prices are currently determined for Medicare. The report then discusses the types of policies used by the Canadian, Australian, and European governments to determine the price of drugs: reference pricing, price ceilings, parallel trade, profit sharing, and value-based pricing. It should be noted that this paper focuses on policies used for brand-name (non-generic) pharmaceuticals, as these policies are more pertinent to the current debate than those used for generic pharmaceuticals. Generics are less expensive and have more price competition than brand-name pharmaceuticals, and thus have not been the focus of debates in the U.S. Under current law, prescription drugs for Medicare beneficiaries are provided through prescription drug plans (PDPs) and Medicare Advantage prescription drug (MA-PD) plans. Unlike MA-PDs, which cover the costs of the entire set of Medicare benefits (Parts A, B, and D), the PDPs only cover the costs of prescription drugs (Part D). The Part D plans have contracts with the Centers for Medicare and Medicaid Services (CMS) to provide prescription drug coverage to Medicare beneficiaries. Individually and with a great deal of flexibility, the plans construct benefit packages (including the formulary, deductible, co-payments, and utilization management tools), arrange a network of pharmacies to dispense the drugs, and negotiate rebates and drug prices with the pharmaceutical manufacturers. The success of each individual plan's ability to negotiate lower prices has a direct impact on the amount enrollees pay. Enrollees are required to make copayments (which is the entire price if the drug is not covered ) and pay premiums that are directly affected by the negotiated drug prices (i.e., the lower the prices paid by the plan, the lower the amounts the plan must charge). Much of beneficiaries' satisfaction with their drug plan may be tied to the amount they pay for drugs. As stated before, the greatest legal impediment to changing the way Medicare drugs are priced is the "noninterference" provision in MMA. Specifically, this provision forbids the Secretary of Health and Human Services (HHS) from negotiating the price of prescription drugs on behalf of Medicare beneficiaries. Section 1860D (i) of the MMA states, "in order to promote competition under this part and in carrying out this part, the Secretary - (1) may not interfere with the negotiations between drug manufacturers and pharmacies and PDP sponsors; and (2) may not require a particular formulary to institute a price structure for the reimbursement of covered Part D drugs." The conference report adds that, "conferees expect PDPs to negotiate price concessions directly with manufacturers." Most of the policies used by other nations, as discussed later in this report, could not be implemented in the U.S. without repealing this provision. Repealing the "noninterference" clause may lead to changing the drug pricing policy for Medicare. Although not strictly necessary, if Congress repeals the provision and allows the Secretary of HHS to negotiate drug prices, it may also wish to provide some guidance as to what type of drug pricing policy it wants the Secretary of HHS to negotiate. Since the number of different policies is innumerate, examining policies that have been applied in other settings may help in exploring the options. In theory, the federal government may be able to leverage its market share to negotiate lower prices. The extent to which the federal government could negotiate lower prices than the Part D drug plans is unknown. Without this knowledge, it is impossible to predict whether a new pricing policy would lead to lower costs for Medicare beneficiaries, the federal government, or other U.S. consumers. Importantly, any new drug pricing policy for Medicare may have ripple effects on manufacturers' research and development of new pharmaceuticals, Part D drug plans' role and ability to compete, pharmacies' profits, as well as other U.S. consumers. The size of these ripples will depend upon the type of pricing policy selected, and the extent to which the federal government negotiates lower prices. Examining and understanding the policies of Canada, Australia, and European nations could help to inform the discussion of drug pricing policies for the Medicare drug benefit. These policies are used in other nations not just to price drugs, but also to determine reimbursement rates and manage utilization. Like Medicare, these governments' policies affect the prices paid for pharmaceuticals. Consequently, the pharmaceutical pricing policies in these countries have a noticeable impact upon the pharmaceutical sales revenues. Similarly, any change in drug pricing policies for Medicare could have a noticeable impact upon total pharmaceutical sales in the U.S. Canada, Australia, and European nations use reference pricing, price ceilings, parallel trade, profit sharing, or value-based pricing policies to mitigate increases in pharmaceutical expenditures due to price increases. Nations may rely on more than one of these methods, and other methods are typically used to control pharmaceutical utilization. Moreover, these countries also use policies currently used by Part D drug plans, Medicaid, and other U.S. health payers, such as price negotiating, rebate negotiation, and price-volume discounts. Germany and the Netherlands are examples of countries in which reference pricing is used for pharmaceuticals. Prices are often determined by clustering drugs by class and setting a uniform rate for all drugs in the cluster. The reimbursement rates are determined through cross-country (or jurisdiction) comparisons or within country comparisons of similar therapies. The cross-country comparisons result in regulation prices in one country directly affecting prices in another country. The drug clusters are controversial because they may ignore differences in safety profiles, efficacy, and application forms across drugs. For example, a manufacturer may argue that its drug is an improvement over others in the same cluster because it causes fewer side effects and can be administered as a pill rather than an injection; however, the value of these improvements may not be fully captured by pricing drugs in clusters. To deal with such nuances, new or innovative products may be excluded from clusters. In Canada, the Patented Medicines Prices Review Board (PMPRB) sets the maximum price manufacturers may charge distributors, hospitals, retail pharmacy chains, and others who purchase drugs in Canada directly from the manufacturer (the price ceiling). Pharmaceutical manufacturers may be fined by the PMPRB if they attempt to charge prices higher than the price ceiling. Canadian purchasers can negotiate prices lower than the price ceiling with manufacturers. In the U.S. Medicare system, the equivalent arrangement would be for the Secretary of HHS to ban manufacturers from setting prices higher than the price ceiling, and allow the Part D drug plans to negotiate prices lower than the price ceiling. Reselling pharmaceuticals to people in other nations commonly occurs in Europe and is termed parallel trade. Manufacturers can not prevent the movement of pharmaceuticals from one European country to another due to the absence of trade barriers among the countries of the European Union. U.S. legislation on the issue has used the term reimportation in recognition of the fact that the U.S. is the largest exporter of pharmaceuticals; importing pharmaceuticals into the U.S. would be, for the most part, tantamount to re-importing them. Reimportation implies importing foreign pharmaceutical prices, as well as the products, and would allow the U.S. to tacitly use other countries' pricing systems. It is one of the few pricing policies that would not require repealing the "noninterference" provision in the MMA. Reimportation of prescription drugs is currently illegal in the United States. The Federal Food, Drug, and Cosmetic Act (FFDCA) prohibits anyone from importing prescription drugs into the United States, unless they are the original manufacturer of the drugs. Consequently, it is illegal for someone to import a drug from a pharmacy in another country, even if the drug was originally manufactured in the United States.