Prices for Brand-Name Drugs Under Selected Federal Programs

Purchases of pharmaceuticals by federal and state governments accounted for over 20 percent of total U.S. expenditures for outpatient prescription drugs in 2003. Because the prices that federal and state governments pay for drugs are determined by a variety of statutory rebates or discounts, supplemented by negotiations with drug manufacturers, drug prices can differ considerably across government programs.

This CBO paper describes the processes by which prices paid to manufacturers (and, in some cases, to wholesale distributors) are determined and the relative average prices that result under the following federal programs:

• The Federal Supply Schedule (FSS) for pharmaceuticals, which is available to all direct federal purchasers;
• The federal ceiling price (FCP) program, which is available to the Department of Veterans Affairs (VA), the Department of Defense (DoD), the Public Health Service (PHS), and the Coast Guard;
• The Department of Veterans Affairs' pharmaceutical prime vendor program;
• The Department of Defense's TRICARE pharmaceutical program;
• The Medicaid rebate program; and
• The Public Health Service's 340B drug pricing program.

The Medicare program, currently in transition with the implementation of changes required under the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA), is not included in the discussion.

CBO estimated the average price paid to manufacturers (and, in some cases, to wholesale distributors) under those federal programs in 2003 for a sample of top-selling brand-name prescription drugs relative to the list price (in this paper, the average wholesale price, or AWP), based on the quantities of those drugs sold in the United States. The sample includes 130 drugs that accounted for about 50 percent of U.S. sales through retail pharmacies and about 70 percent of U.S. sales of brand-name drugs through retail pharmacies in 2003. The analysis is restricted to single-source drugs (brand-name drugs still under patent protection) for which purchasers do not have access to generic alternatives.

The prices paid to manufacturers for brand-name drugs are only one of several factors that determine total drug spending. The cost of dispensing the drug to the patient, the savings generated from the use of generic drugs, and other important factors that also affect total drug spending are summarized in Box 1. Those factors, although important, have not been included in this analysis.

The prices paid to manufacturers vary substantially across government programs. CBO estimates that the average prices for single-source brand-name prescription drugs for the third quarter of calendar year 2003 range from 53 percent of the list price in the case of the Federal Supply Schedule to 41 percent of the list price in the case of DoD.

The relationships among the prices reported in this paper are likely to hold only under current regulations and market conditions. Future changes in pricing regulations would be likely to change the relationships among those prices. That is because the price charged to any one purchaser for a particular drug represents strategic decisions on the part of the manufacturer, and that price would be likely to change if it was extended to other purchasers through regulation. For example, when prices from the Federal Supply Schedule for pharmaceuticals program were included in the calculation of Medicaid's best prices (used to calculate Medicaid rebates), FSS prices rose. Moreover, the relationships do not apply to every drug.

For instance, although the FSS price is lower relative to the AWP than the best price, on average, the FSS price is higher than the best price for about one-fifth of the drugs examined in this analysis.

The AWP is a publicly available, suggested list price for sales of a drug by a wholesaler to a pharmacy or other provider; it is reported in publications such as Thomson Micromedex's Red Book and First DataBank's Blue Book. However, the AWP is not the actual price that wholesalers charge but is more like a sticker price in the automobile industry.

The AWP was chosen as the main price reference for this paper because it is frequently used to set payment rates in pharmaceutical transactions. For example, state Medicaid agencies, pharmacy benefit managers, and other third-party payers frequently use the AWP to set payment rates to retail pharmacies for providing single-source brand-name drugs to their beneficiaries. In addition, studies have reported savings from the Medicare drug discount card program (which began June 1, 2004) in terms of percentage discounts off of the AWP. Finally, pharmacies often use the AWP as a basis for pricing prescriptions to cash-paying customers. Therefore, the prices that manufacturers and wholesale distributors charge for brand-name prescription drugs under federal programs are expressed in Table 1 and described in the text below as a percentage of the AWP.