In the Commission’s June report, released yesterday, three chapters examine policy issues related to prescription drugs. The Commission remains concerned about rapid growth in drug prices, which can affect beneficiary access to needed medications, as well as the financial sustainability of the Medicare program. The June report is the product of deliberations that the Commission began last spring about how to address rising drug prices within the Medicare context. The report includes recommendations for changes to Medicare Part D, and lays out numerous policy ideas related to Part B drugs, which the Commission will continue to explore in the coming year.
One challenge for policymakers attempting to slow the growth of drug prices in Medicare is that Medicare does not purchase drugs directly. Instead, it makes payments to drug plans, physicians, and health care facilities, which in turn negotiate rates with drug manufacturers, both directly and indirectly. Because Medicare does not purchase drugs from manufacturers, its influence on drug prices is indirect. External factors, including the FDA approval process and patent law, can also affect the prices Medicare pays for prescription drugs. Another challenge for policymakers is the sheer complexity of the U.S. prescription drug market, which encompasses a wide array of actors and market transactions.
When the Commission began its deliberations on drug policy, which ultimately shaped the contents of the June report, it started with two informational presentations that were intended to provide background and context for its discussions. The Commission is now releasing annotated versions of these presentations to serve as a resource for policymakers.
The first presentation describes how Medicare pays for drugs and the magnitude of Medicare drug spending. Drug spending is typically quantified based on the measurement concept used in CMS’s national health expenditure accounts—a final purchase, retail concept. Using such a measure, about 13% of Medicare spending in 2013 was for retail prescription drugs. However, in this presentation we consider a broader measurement concept that also includes drugs used as intermediate inputs for services at hospitals, nursing facilities, and so forth. Using this broader measure, we find that about 19% of Medicare program spending in 2013 was for drugs and pharmacy services.
The second presentation provides background material about the development and approval processes for drugs and biologics, as well as information about drug-related industries such as pharmacies and pharmacy benefit managers. It also includes an illustrative example of the complex set of market transactions that underlie a beneficiary receiving a prescription drug.