oversight

Medicare Part D Coverage Gap: Discount Program Effects and Brand-Name Drug Price Trends

Published by the Government Accountability Office on 2012-09-28.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                             United States Government Accountability Office

GAO                          Report to Congressional Requesters




September 2012
                             MEDICARE PART D
                             COVERAGE GAP
                             Discount Program
                             Effects and
                             Brand-Name Drug
                             Price Trends




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GAO-12-914
                                           September 2012

                                           MEDICARE PART D COVERAGE GAP
                                           Discount Program Effects and Brand-Name Drug
                                           Price Trends
Highlights of GAO-12-914, a report to
congressional requesters




Why GAO Did This Study                     What GAO Found
The Patient Protection and Affordable      As part of Medicare’s Part D Coverage Gap Discount Program (Discount
Care Act of 2010 established the           Program), the Centers for Medicare & Medicaid Services (CMS), located within
Discount Program to help Medicare          the Department of Health and Human Services (HHS), oversees the provision of
Part D beneficiaries with their            discounts by plan sponsors to eligible beneficiaries when they purchase brand-
prescription drug costs while in the       name drugs and monitors that discounts are paid for by drug manufacturers.
coverage gap, which occurs between         CMS checks prescription drug data to verify that sponsors provide accurate
the initial and catastrophic coverage      discounts at the point-of-sale to eligible beneficiaries in the coverage gap. These
periods where Medicare helps pay for       checks include verifying whether a beneficiary has reached the coverage gap
drug costs. Until the Discount Program
                                           and that the plan sponsor has calculated the discount amount correctly. CMS
began in 2011, beneficiaries in the
                                           also tracks that manufacturers pay plan sponsors for the discounts sponsors
coverage gap paid 100 percent of drug
costs. The Discount Program required
                                           have provided to beneficiaries and has implemented a dispute resolution process
manufacturers to provide a 50 percent      for manufacturers disputing discount payment amounts. CMS also performs
discount on the price of brand-name        other activities such as monitoring beneficiary complaints related to the program.
drugs for beneficiaries in the gap.        The plan sponsors, pharmacy benefit managers (PBM) that negotiate on behalf
GAO was asked to describe (1) CMS’s        of plan sponsors, and drug manufacturers GAO interviewed had different
oversight of the Discount Program;         perspectives on aspects of the drug pricing and plan design effects of the
(2) perspectives of plan sponsors,         Discount Program. Most sponsors and PBMs believed the Discount Program
manufacturers, and PBMs on effects of      may have been a contributing factor in the rising prices of some brand-name
the Discount Program; and (3) how          drugs by some manufacturers. However, most manufacturers did not believe the
prices for brand-name drugs used by        Discount Program affected drug prices they negotiated with sponsors and PBMs.
beneficiaries in the coverage gap and      The PBMs we interviewed also told us they observed that some manufacturers
by those who did not reach the gap         decreased the amount of rebates for the brand-name drugs they offered, which
changed before and after the start of      they believe occurred as a result of the Discount Program. In comparison, most
the Discount Program. To describe          of the plan sponsors did not observe manufacturers decreasing rebate amounts
CMS’s oversight, GAO reviewed CMS          and most manufacturers reported no effects on their rebate negotiations as a
documents and interviewed CMS              result of the Discount Program. Most sponsors and PBMs told GAO that the
officials. To describe perspectives on     Discount Program did not affect Part D plan formularies, plan benefit designs, or
the effects of the Discount Program,
                                           utilization management practices.
GAO interviewed the 7 largest Part D
plan sponsors based on enrollment          GAO found that the prices for high-expenditure brand-name drugs used by
data, 8 of 10 manufacturers of brand-      beneficiaries in the coverage gap and by those who did not reach the gap in
name drugs with the highest                2011 increased at a similar rate before and after the Discount Program was
expenditures in the gap, and 3 PBMs        implemented in January 2011. Specifically, from January 2007 to December
who contracted with sponsors GAO           2010, before the Discount Program began, the median price for the basket of
interviewed. To describe price             77 brand-name drugs (weighted by the utilization of each drug) used by
changes, GAO used CMS Part D data          beneficiaries in the coverage gap increased 36.2 percent. During the same
from 2007 to 2011 to track prices for      period, the median price for the basket of 78 brand-name drugs used by
high-expenditure brand-name drugs
                                           beneficiaries who did not reach the coverage gap increased 35.2 percent. From
used by those in and those who did not
                                           December 2010 through December 2011, the first year with the Discount
reach the gap. GAO compared prices
for the two baskets because drugs          Program, the median price for the two baskets increased equally by about
used by those in the gap may be more       13 percent, the greatest increase in median price for both baskets compared to
susceptible to price increases since       earlier individual years.
manufacturers must provide the             HHS reviewed a draft of this report and in its written comments noted that GAO’s
discount for these drugs.                  findings on stakeholder perspectives and changes in brand-name drug prices
View GAO-12-914. For more information,     were consistent with its experience and CMS’s drug price analysis. HHS stated
contact John Dicken at (202) 512-7114 or   that CMS will continue to monitor the Discount Program and Part D drug prices.
DickenJ@gao.gov.

                                                                                   United States Government Accountability Office
Contents


Letter                                                                                             1
                       Background                                                                  5
                       CMS Oversees Coverage Gap Discounts Provided by Plan Sponsors
                         and Paid for by Manufacturers                                           15
                       Plan Sponsors, PBMs, and Manufacturers Had Different
                         Perspectives on Aspects of the Drug Pricing and Plan Design
                         Effects of the Discount Program                                         20
                       Prices Increased at a Similar Rate for Brand-Name Drugs Used by
                         Beneficiaries in the Coverage Gap and by Those Who Did Not
                         Reach the Gap                                                           23
                       Agency Comments                                                           26

Appendix I             Methodology for Examining Brand-Name Drug Price Trends                    28



Appendix II            Brand-Name Drugs Included in Price Trend Analyses                         33



Appendix III           How the Discount Program Works at the Point-of-Sale for
                       Brand-Name Drugs                                                          37



Appendix IV            Comments from the Department of Health and Human Services                 39



Appendix V             GAO Contact and Staff Acknowledgments                                     40



Related GAO Products                                                                             41



Tables
                       Table 1: Medicare Enrollment by Plan Type and Income Subsidy
                                Status, 2011                                                       6
                       Table 2: Coinsurance Paid by Non-LIS beneficiaries While in the
                                Coverage Gap for Brand-Name and Generic Drugs, 2011 to
                                2020                                                             12



                       Page i                             GAO-12-914 Medicare Part D Discount Program
          Table 3: The High-Expenditure Brand-Name Drugs Used by Non-
                   LIS Beneficiaries in the Coverage Gap and by Those Who
                   Did Not Reach the Coverage Gap in 2011                            33


Figures
          Figure 1: Comparison of a Non-LIS Beneficiary’s Out-of-Pocket
                   Spending for Prescription Drugs in the Coverage Gap
                   under the Standard Benefit in 2011, without and with the
                   Medicare Coverage Gap Discount Program in Place                   13
          Figure 2: Price Indexes for Brand-Name Drugs Used by Medicare
                   Part D Beneficiaries in the Coverage Gap and by Those
                   Who Did Not Reach the Gap in 2011                                 24
          Figure 3: Annual Percent Change in Price for Brand-Name Drugs
                   Used by Medicare Part D Beneficiaries in the Coverage
                   Gap and by Those Who Did Not Reach the Gap in 2011                25
          Figure 4: Hypothetical Example: A Non-LIS Beneficiary in a
                   Standard Benefit Plan Purchasing a Brand-Name Drug
                   While in the Coverage Gap in 2011                                 38




          Page ii                             GAO-12-914 Medicare Part D Discount Program
Abbreviations

CMS                        Centers for Medicare & Medicaid
                             Services
Discount Program           Medicare Coverage Gap Discount
                             Program
Discount Program Agreement Coverage Gap Discount Program
                             Agreement
DR                         delayed release
ER                         extended release
FDA                        Food and Drug Administration
HCERA                      Health Care and Education
                             Reconciliation Act of 2010
HCT                        hydrochlorothiazide
HFA                        hydrofluoroalkanes
HHS                        Department of Health and Human
                             Services
LA                         long acting
LIS                        low-income subsidy
MA-PDP                     Medicare Advantage prescription
                             drug plan
MedPAC                     Medicare Payment Advisory
                             Commission
MMA                        Medicare Prescription Drug,
                             Improvement, and Modernization
                             Act of 2003
NDC                        national drug code
NDC-9                      nine-digit national drug code
PBM                        pharmacy benefit manager
PDE                        prescription drug event
PDP                        stand-alone prescription drug plan
PPACA                      Patient Protection and Affordable Care
                             Act
TPA                        third-party administrator



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Page iii                                     GAO-12-914 Medicare Part D Discount Program
United States Government Accountability Office
Washington, DC 20548




                                   September 28, 2012

                                   The Honorable Max Baucus
                                   Chairman
                                   Committee on Finance
                                   United States Senate

                                   The Honorable Henry A. Waxman
                                   Ranking Member
                                   Committee on Energy and Commerce
                                   House of Representatives

                                   The Honorable Sander M. Levin
                                   Ranking Member
                                   Committee on Ways and Means
                                   House of Representatives

                                   The Honorable John D. Dingell
                                   House of Representatives

                                   In 2011, approximately 29 million Medicare beneficiaries were enrolled in
                                   Medicare’s outpatient prescription drug benefit, known as Part D. Prior to
                                   2011, many Medicare beneficiaries with Part D prescription drug
                                   coverage paid 100 percent of their drug costs while in the coverage gap
                                   or “donut hole.” The coverage gap occurs between the initial and
                                   catastrophic coverage periods, during which Medicare payments reduce
                                   beneficiaries’ costs. The Medicare Coverage Gap Discount Program
                                   (Discount Program), established by the Patient Protection and Affordable
                                   Care Act (PPACA) in 2010, was implemented in 2011 as part of an effort
                                   to assist beneficiaries who do not receive Part D’s low-income subsidy
                                   (LIS) with their drug costs when they reach the coverage gap. 1



                                   1
                                    For purposes of this report, references to PPACA include the amendments made by
                                   the Health Care and Education Reconciliation Act of 2010 (HCERA). Pub. L. No. 111-148,
                                   § 3301,124 Stat. 119, 461 (2010), as amended by HCERA, Pub. L. No. 111-152,
                                   §§ 1101(b), (d), 124 Stat. 1029, 1037, 1039 (amending various sections of Subtitle D of
                                   Title XVIII of the Social Security Act (codified at 42 U.S.C. §§ 1395w-101 et seq.)).
                                   Beneficiaries receiving Part D’s LIS have limited income and resources and are eligible for
                                   subsidies paid by Medicare to the drug plan in which they are enrolled. LIS beneficiaries
                                   are not eligible for the Discount Program.




                                   Page 1                                       GAO-12-914 Medicare Part D Discount Program
Beginning in January 2011, PPACA required that drug manufacturers
wishing to have their drugs covered under the Part D program participate
in the Discount Program, which requires them to provide a 50 percent
discount on the price that Part D plan sponsors 2 negotiate for brand-name
drugs when beneficiaries reach the coverage gap. 3 Under PPACA,
Medicare will provide a subsidy over time to cover more of beneficiaries’
spending when they reach the coverage gap so that by 2020 the
coverage gap is eliminated. The 50 percent discount that brand-name
manufacturers must pay for brand-name drugs is permanent.

You raised concerns that manufacturers participating in the Discount
Program may raise prices for brand-name drugs used by beneficiaries
who are in the coverage gap more rapidly than for other drugs to offset
the 50 percent discount that manufacturers are required to give these
drugs. You also asked us to describe the oversight that the Centers for
Medicare & Medicaid Services (CMS), located within the Department of
Health and Human Services (HHS), provides of the new Discount
Program and the potential effects of the new program. In this report, we
describe (1) CMS’s oversight activities for the Discount Program; (2) the
perspectives of Medicare Part D plan sponsors, drug manufacturers, and
pharmacy benefit managers (PBM) on the effects of the Discount
Program; and (3) how prices changed before and after implementation of
the Discount Program for brand-name drugs used by beneficiaries who
did and beneficiaries who did not reach the coverage gap in 2011.

To describe CMS’s oversight activities for the Discount Program, we
reviewed relevant laws, such as PPACA, and regulations, as well as
guidance that CMS provided to plan sponsors and drug manufacturers
clarifying various policy and technical aspects of the Discount Program.
We also reviewed CMS’s Coverage Gap Discount Program Agreement
(Discount Program Agreement), the contract between CMS and drug
manufacturers outlining CMS’s oversight responsibilities for the Discount
Program and drug manufacturers’ obligation to provide discounts for




2
 Plan sponsors, often private insurers, contract with the Centers for Medicare & Medicaid
Services to offer the prescription drug benefit.
3
 A brand-name drug is a drug marketed under a proprietary, trademark-protected name.
Pharmacy benefit managers may also negotiate brand-name drug prices on behalf of plan
sponsors.




Page 2                                      GAO-12-914 Medicare Part D Discount Program
brand-name drugs to eligible beneficiaries in the coverage gap. 4 We also
interviewed CMS officials to obtain information on CMS’s oversight
activities, including steps the agency has taken to monitor manufacturers’
and plan sponsors’ adherence to their Discount Program responsibilities,
as outlined in the Discount Program Agreement, and whether the agency
has reviewed outcomes related to the program.

We also interviewed a sample of Medicare Part D plan sponsors, PBMs,
and drug manufacturers to describe their perspectives on the effects of
the Discount Program. To select our sample of plan sponsors to
interview, we used Medicare Part D enrollment data provided by CMS to
identify the plan sponsors with the highest non-LIS beneficiary enrollment
in Medicare Part D as of January 1, 2011. 5 We interviewed the seven
largest plan sponsors that represented about 68 percent of total non-LIS
enrollment in Medicare Part D as of January 1, 2011. Additionally, we
interviewed three PBMs that contracted with at least one of the plan
sponsors we interviewed. To select our sample of drug manufacturers to
interview, we used 2011 Medicare Part D prescription drug event (PDE)
data provided by CMS to identify the top 10 manufacturers whose brand-
name drugs accounted for the highest total drug expenditures used by
non-LIS Medicare Part D beneficiaries in the coverage gap in 2011. 6 Of
the top 10 manufacturers, we interviewed 8 manufacturers that
represented about 54 percent of the total expenditures for brand-name
drugs used by non-LIS beneficiaries who reached the coverage gap in
2011. We used structured interview protocols to gather consistent
information about the perspectives of each entity on the effects of the
Discount Program, such as any changes in drug prices, rebate
negotiations, and prescription drug benefits. 7




4
 42 U.S.C. § 1395w-114a(b); 77 Fed. Reg. 22072, 22173 (Apr. 12, 2012) (to be codified at
42 C.F.R. § 2315). The Discount Program Agreement is signed between manufacturers
and the Secretary of HHS.
5
 To identify the plan sponsors, we excluded plans with restricted enrollment, including
employer-sponsored, Demonstration, and Programs of All-Inclusive Care for the Elderly.
6
 To identify the top 10 manufacturers, we excluded brand-name drug expenditures for
beneficiaries enrolled in plans with restricted enrollment, including employer-sponsored,
Demonstration, and Programs of All-Inclusive Care for the Elderly.
7
 Rebates are payments that manufacturers make to plan sponsors so that the sponsors
encourage the use of certain drugs by their beneficiaries.




Page 3                                       GAO-12-914 Medicare Part D Discount Program
To describe how prices changed before and after implementation of the
Discount Program for brand-name drugs used by beneficiaries who did
and beneficiaries who did not reach the coverage gap in 2011, we
analyzed the trend in Medicare Part D prices from January 2007 through
December 2011 for two baskets of brand-name drugs used by non-LIS
beneficiaries. The first basket of brand-name drugs included 77 high-
expenditure brand-name drugs used by non-LIS beneficiaries while in the
coverage gap in 2011 and the second basket included 78 high-
expenditure brand-name drugs used by non-LIS beneficiaries who did not
reach the coverage gap in 2011. 8 We compared price trends for these
two baskets because brand-name drugs used by non-LIS beneficiaries
while in the coverage gap in 2011 may be more susceptible to price
increases, since manufacturers must provide a 50 percent discount for
these drugs, compared with drugs used by non-LIS beneficiaries who did
not reach the gap and thus were not subject to the discount. 9 For each of
the drugs in the two baskets, we analyzed the median price, weighted by
the utilization of each drug. The drug prices we analyzed were based on
prices negotiated by plan sponsors and were affected by price changes
made by manufacturers. We also conducted additional analyses of
subsets of drugs of these baskets. For example, because a significant
number of drugs overlapped both baskets (50 drugs), we compared price
trends for the brand-name drugs that did not overlap. (See app. I for a
detailed discussion of our methodology for examining brand-name drug
price changes and app. II for a listing of the brand-name drugs in each
basket.)

Our findings are limited to those sponsors, PBMs, and manufacturers we
spoke with and are not representative of the effects observed across all of
these types of entities. Additionally, any price changes we observed may
not be directly related to the Discount Program since multiple factors can
affect drug prices over time. We reviewed data we received from CMS for


8
 For the first basket, we selected high-expenditure drugs that were used while non-LIS
beneficiaries were in the coverage gap and did not include high-expenditure drugs used
by these beneficiaries during the deductible and initial coverage periods, which are prior to
the gap, or those during the catastrophic coverage period, which is after the gap. Drugs
can be high expenditure based on their price and utilization.
9
 While manufacturers did not know in advance specifically which individual beneficiaries
would reach the coverage gap in 2011, there may have been an incentive to raise prices
for brand-name drugs that were often used by beneficiaries who reached the coverage
gap in prior years or by beneficiaries who were likely to have higher-than-average annual
drug expenditures.




Page 4                                       GAO-12-914 Medicare Part D Discount Program
                          reasonableness and consistency, including screening for outliers. We
                          also reviewed documentation and spoke with CMS officials about steps
                          taken to ensure data reliability. Based on this review, we determined that
                          the data used in this report were sufficiently reliable for our purposes. We
                          conducted this performance audit from August 2011 through September
                          2012 in accordance with generally accepted government auditing
                          standards. Those standards require that we plan and perform the audit to
                          obtain sufficient, appropriate evidence to provide a reasonable basis for
                          our findings and conclusions based on our audit objectives. We believe
                          that the evidence obtained provides a reasonable basis for our findings
                          and conclusions based on our audit objectives.



Background
Medicare Part D           Approximately 49 million elderly and disabled individuals were enrolled in
Enrollment and Spending   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). 10 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).




                          10
                           PDPs and MA-PDPs are offered by insurance companies and other private companies.




                          Page 5                                  GAO-12-914 Medicare Part D Discount Program
Table 1: Medicare Enrollment by Plan Type and Income Subsidy Status, 2011

 Medicare enrollment                                                                               Number in millions
 Total Medicare enrollment                                                                                                 48.7
 Total Medicare Part D enrollment                                                                                          29.3
       Stand-alone prescription drug plans (PDP)                                                                           18.6
       Medicare Advantage prescription drug plans (MA-PDP)                                                                 10.7
 Total Medicare Part D enrollment                                                                                          29.3
       Non-low-income subsidy (LIS)                                                                                        18.8
       LIS                                                                                                                 10.5
Source: Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds and
Medicare Payment Advisory Commission (MedPAC).

Note: Total Medicare enrollment for 2011 is from the Board of Trustees Report and Medicare Part D
enrollment figures are from MedPAC’s analysis of April 2011 enrollment data. See Boards of
Trustees, Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds,
2012 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal
Supplementary Medical Insurance Trust Funds (Washington, D.C.: Apr. 23, 2012) and Medicare
Payment Advisory Commission, March 2012 Report to the Congress: Medicare Payment Policy
(Washington, D.C.: Mar. 15, 2012).


In 2011, federal spending on Part D totaled approximately $67 billion,
accounting for about 12 percent of total Medicare expenditures. 11
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. 12 To help keep Part D spending down, CMS relies on



11
  See Boards of Trustees, Federal Hospital Insurance and Federal Supplementary
Medical Insurance Trust Funds, 2012 Annual Report of the Boards of Trustees of the
Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds
(Washington, D.C.: Apr. 23, 2012).
12
  MedPAC contracted with researchers at Acumen, LLC, to construct a series of volume-
weighted price indexes for all drug and biologic prescriptions filled under Medicare Part D.
The indexes do not reflect rebates from manufacturers, but do reflect discounts from
pharmacies at the point-of-sale. MedPAC also reported that taking into account the
substitution of generics for brand-name drugs, overall Part D prices rose 1 percent
cumulatively between January 2006 and December 2009. Medicare Payment Advisory
Commission, March 2012 Report to the Congress: Medicare Payment Policy (Washington,
D.C.: Mar. 15, 2012). A generic drug is chemically equivalent to its branded counterpart
and is generally marketed by multiple manufacturers under a nonproprietary name.




Page 6                                                         GAO-12-914 Medicare Part D Discount Program
                          competing plan sponsors to negotiate drug prices for the beneficiaries in
                          their plans. 13 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. 14
                          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. 15


Medicare Part D Benefit   The Medicare Prescription Drug, Improvement, and Modernization Act of
and Plan Design           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. 16 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. 17


                          13
                            Federal law prohibits the Secretary of HHS from interfering with price negotiations
                          between plan sponsors and drug manufacturers and pharmacies. 42 U.S.C. § 1395w-
                          111(i).
                          14
                            Plan sponsors may also contract with PBMs to help manage their prescription drug
                          benefits, for example, by operating mail-order prescription services and administrative
                          claims processing systems. A portion of the manufacturer’s rebate may be retained by the
                          PBM or the plan sponsor.
                          15
                            A premium is a periodic payment that a beneficiary must make to be enrolled in a Part D
                          plan and receive prescription drug coverage. Beginning in 2011, PPACA required
                          beneficiaries with higher incomes to pay an income-related premium, meaning that they
                          must pay higher premiums than beneficiaries with lower incomes. 42 U.S.C. § 1395w-
                          113(a).
                          16
                            Pub. L. No. 108-173, § 101, 117 Stat. 2066, 2071 (adding a new Part D to title XVIII of
                          the Social Security Act) (codified at 42 U.S.C. §§ 1395w-101 et seq.).
                          17
                            The standard parameters are adjusted each year based on the percentage increase in
                          average per capita total Part D drug expenditures for beneficiaries.




                          Page 7                                       GAO-12-914 Medicare Part D Discount Program
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. 18 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.

MMA also allows plan sponsors to offer plans that are either actuarially
equivalent to or exceed the defined standard benefit. These benefit plans
can vary in design with regards to the monthly premiums, initial coverage
limit, and cost-sharing arrangements such as copayments and
coinsurance, but include the elements of the defined standard benefit. For
example, plans with enhanced drug benefits may charge higher monthly
premiums than defined standard benefit plans, but may offer a reduced or
no deductible, charge a lower coinsurance amount than the 25 percent
coinsurance during the initial coverage period, and provide some
coverage for drugs when beneficiaries reach the coverage gap. Most
Part D beneficiaries are enrolled in these actuarially equivalent or
enhanced benefit plans. 19 Each plan also has a formulary (a list of the
prescription drugs that it covers) and plan sponsors select the
coinsurance or copay amount that beneficiaries must pay for each listed



18
  During the initial coverage period up until $2,840, the beneficiary paid a total of $942.50
in out-of-pocket costs ($310 for the deductible plus $632.50, which represents 25 percent
coinsurance) while the plan paid $1897.50 (or 75 percent coinsurance).
19
  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.




Page 8                                        GAO-12-914 Medicare Part D Discount Program
                           drug. 20 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. 21 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. 22


Medicare Part D Coverage   The Discount Program began in January 2011 after being established in
Gap Discount Program       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
                           the initial coverage limit during the year. 23 Beneficiaries that are enrolled
                           in enhanced plans providing some coverage for brand-name drugs when
                           they reach the coverage gap may also receive the discount after




                           20
                             Sponsors must adhere to a minimum set of formulary requirements established in
                           statute and regulation. Sponsors generally must include at least two drugs within each
                           therapeutic category and class of covered Part D drugs. Exceptions are allowed, for
                           example when there is only one drug in a particular category or class. In addition, CMS
                           requires that formularies include “all or substantially all” drugs within six designated
                           categories of clinical concern. See 42 U.S.C. § 1395w-104(b)(3)(C)(i); 42 C.F.R.
                           § 423.120(b)(2)(2011); CMS, Medicare Prescription Drug Benefit Manual, Chapter 6,
                           § 30.2.5 (2010).
                           21
                             CMS allows plans to establish a specialty tier for high-cost drugs when their monthly
                           cost exceeds a certain threshold, and in 2011 CMS established a threshold of $600.
                           Standard benefit plans may not charge a coinsurance amount greater than 25 percent for
                           such drugs. 42 C.F.R. § 423.578(a)(7)(2011); CMS, Medicare Prescription Drug Benefit
                           Manual, Chapter 6, § 30.2.4 (2010).
                           22
                             These utilization management practices can include (1) step therapy, which requires
                           that a beneficiary try lower-cost drugs before a sponsor will cover a more costly drug;
                           (2) prior authorization, which requires a beneficiary to obtain the sponsor’s approval
                           before a drug is covered for that individual; and (3) quantity limits, which restrict the
                           dosage or number of units of a drug provided within a certain period of time. Utilization
                           management practices are subject to CMS approval.
                           23
                             To be eligible for the Discount Program, beneficiaries must not have not incurred costs
                           for covered Part D drugs in the year equal to the annual out-of-pocket threshold.
                           Beneficiaries with such incurred costs would be eligible for catastrophic coverage.
                           42 U.S.C. § 1395w-114a(g)(1).




                           Page 9                                        GAO-12-914 Medicare Part D Discount Program
supplemental benefits are applied. 24 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. 25 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. 26 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. 27 Specifically, beginning in 2013, Medicare will pay
2.5 percent of the plan-negotiated price for brand-name drugs. 28 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



24
  For beneficiaries enrolled in enhanced benefit plans that have brand-name drug
coverage while in the coverage gap, the 50 percent discount is applied to the amount the
beneficiary owes, according to their supplemental coverage. 42 U.S.C. § 1395w-
114a(c)(2). For example, a beneficiary with a $30 copayment for brand-name drugs while
in the coverage gap pays $15 and the manufacturer pays $15, after applying the 50
percent discount to the copayment.
25
  42 U.S.C. § 1395w-114a(a). In 2011, over 99 percent of brand-name drug
manufacturers participated in the Discount Program, according to CMS officials. The
discount is only applicable for brand-name drugs and those covered under Part D.
42 U.S.C. § 1395w-114a(g)(2).
26
 42 U.S.C. § 1395w-102(b)(4)(E).
27
  PPACA, § 3301 (amending Part D of title XVIII) (codified at 42 U.S.C. §§ 1395w-101 et
seq.).
28
 42 U.S.C. § 1395w-102(b)(2)(D).




Page 10                                     GAO-12-914 Medicare Part D Discount Program
reached the coverage gap. 29 Medicare will increase its subsidy to
75 percent for generic drugs by 2020. 30 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. 31 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.




29
 42 U.S.C. § 1395w-102(b)(2)(C).
30
  For brand-name drugs, all applicable discounts paid by manufacturers count toward
reaching the beneficiary’s annual catastrophic coverage threshold limit. See 42 U.S.C.
§ 1395w-102(b)(4)(E). Since no such payments are made on behalf of beneficiaries in
relation to generic drugs, only the amount the beneficiary pays for a generic drug counts
toward reaching the threshold limit.
31
  The substitution of generic drugs for brand-name drugs has contributed to the slower-
than-expected growth in Medicare Part D spending between 2006 and 2011. See Kaiser
Family Foundation, Medicare Part D Spending Trends: Understanding Key Drivers and
the Role of Competition (Washington, D.C.: May 2012).




Page 11                                      GAO-12-914 Medicare Part D Discount Program
Table 2: Coinsurance Paid by Non-LIS beneficiaries While in the Coverage Gap for
Brand-Name and Generic Drugs, 2011 to 2020

                                            Percent
                         Brand-name drugs                       Generic drugs
 Calendar       Beneficiary   Medicare   Manufacturer       Beneficiary   Medicare
 year          coinsurance     subsidy      discount       coinsurance     subsidy
 2011                 50%          0%             50%             93%           7%
 2012                   50          0                 50            86           14
 2013                 47.5         2.5                50            79           21
 2014                 47.5         2.5                50            72           28
 2015                   45          5                 50            65           35
 2016                   45          5                 50            58           42
 2017                   40         10                 50            51           49
 2018                   35         15                 50            44           56
 2019                   30         20                 50            37           63
 2020                   25         25                 50            25           75
Source: CMS.



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.




Page 12                                  GAO-12-914 Medicare Part D Discount Program
Figure 1: Comparison of a Non-LIS Beneficiary’s Out-of-Pocket Spending for Prescription Drugs in the Coverage Gap under
the Standard Benefit in 2011, without and with the Medicare Coverage Gap Discount Program in Place




                                        Note: Once the catastrophic threshold is reached, the beneficiary pays the greater of 5 percent
                                        coinsurance or copayments of $2.50 for generics or preferred multiple-source drugs and $6.30 for
                                        other drugs, including brand-name drugs. A multiple-source drug is one for which there is at least one
                                        other drug product rated as therapeutically and pharmaceutically equivalent. Therapeutically and
                                        pharmaceutically equivalent drugs have the same active ingredients and clinical effects. A preferred
                                        drug is a drug that is included on a plan’s formulary for which beneficiary cost-sharing is lower
                                        (i.e., the drug has a preferred position), compared to a nonpreferred drug.
                                        a
                                         This side of the figure is an example of what beneficiary out-of-pocket spending for prescription
                                        drugs would have been in 2011 if the Coverage Gap Discount Program had not been implemented.




Discount Program                        Plan sponsors, drug manufacturers, and CMS each have responsibilities
Responsibilities for Plan               for carrying out the Discount Program. Plan sponsors are responsible for
Sponsors, Drug                          making payments at the point-of-sale for the 50 percent discount for
                                        brand-name drugs on behalf of manufacturers, providing information to
Manufacturers, and CMS                  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



                                        Page 13                                           GAO-12-914 Medicare Part D Discount Program
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. 32 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. 33

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.




32
 A dispensing fee is the amount paid to the pharmacy for dispensing a medication.
33
  An NDC is an identifying prescription drug product number that is registered and listed
with the FDA. See http://www.fda.gov/Drugs/InformationOnDrugs/ucm142438.htm for the
FDA’s listing of NDCs (accessed July 3, 2012).




Page 14                                     GAO-12-914 Medicare Part D Discount Program
                           CMS oversees the provision of discounts by plan sponsors to eligible
CMS Oversees               beneficiaries who reach the coverage gap, and ensures that the discounts
Coverage Gap               are paid for by drug manufacturers. CMS oversight activities include
                           performing checks of prescription drug data to verify that plan sponsors
Discounts Provided         provide accurate discounts at the point-of-sale to eligible beneficiaries
by Plan Sponsors and       who reach the coverage gap. CMS also tracks the payment of discounts
Paid for by                by drug manufacturers to plan sponsors and has implemented a dispute
                           resolution process to resolve manufacturer disputes about discounts. In
Manufacturers              addition, CMS performs other activities, such as monitoring beneficiary
                           complaints, and has reported on certain Discount Program outcomes.


CMS Checks Prescription    CMS performs 15 automated checks of PDE data specific to the Discount
Drug Data to Verify That   Program that verify whether plan sponsors have provided and accurately
Plan Sponsors Provide      calculated discounts at the point-of-sale to eligible beneficiaries who
                           reach the coverage gap. 34 The PDE data checks include verifying that
Accurate Discounts to
                           plan sponsors have provided discounts to beneficiaries who are eligible
Eligible Beneficiaries     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. 35 CMS officials told us that an additional use of the PDE data
                           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.



                           34
                             CMS officials told us that the 15 PDE checks are included among the 150 PDE checks
                           that CMS conducts for the Medicare Part D program.
                           35
                             According to CMS, plan sponsors are able to resolve most errors and may contact CMS
                           for assistance as needed.




                           Page 15                                   GAO-12-914 Medicare Part D Discount Program
                          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. 36 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. 37


CMS Tracks Discount       CMS tracks the payment of discounts by drug manufacturers to plan
Payments by               sponsors and can impose penalties for failure to pay. CMS officials
Manufacturers and Has a   reported that they track manufacturers’ payments to plan sponsors for
                          discounts by reviewing confirmation reports that plan sponsors submit to
Process to Resolve        the agency when they receive payments from manufacturers.
Payment Disputes          Manufacturers receive quarterly invoices from the TPA of discount
                          payments owed to plan sponsors based on aggregated PDE data. 38
                          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. 39 CMS officials told us a few


                          36
                           CMS, Prescription Drug Event (PDE) Record Changes Required to Close the Coverage
                          Gap (Baltimore, Md.: Apr. 30, 2010).
                          37
                           CMS, Update on Part D National Drug Code Edits (Baltimore, Md.: Sept.12, 2011).
                          38
                            Three of the eight manufacturers we interviewed told us that they experienced problems
                          with handling the quarterly invoices because the data files were provided in an outdated
                          format, which required additional resources to program and interpret the invoice data. The
                          TPA has other responsibilities related to the invoicing of manufacturers, including notifying
                          manufacturers of invoice errors and making adjustments as needed to quarterly invoices.
                          CMS officials told us they frequently monitor the TPA’s performance via phone, e-mail,
                          and meetings. CMS also plans to conduct its first audit and onsite visit of the TPA in 2012.
                          39
                            CMS requires manufacturers to pay all applicable discounts to plan sponsors within
                          38 days of receipt of the quarterly invoices.




                          Page 16                                       GAO-12-914 Medicare Part D Discount Program
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. 40 CMS officials said they
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. 41 If the manufacturer disagrees with
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. 42 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.




40
   CMS officials told us the agency has not determined what entity would be financially
liable for making quarterly invoice payments if the company that went bankrupt does not
pay these invoices.
41
  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).
42
  CMS, Medicare Coverage Gap Discount Program – Dispute Resolution (Baltimore, Md.:
Mar. 5, 2012). Prior to CMS’s issuance of the March 2012 guidance, three of the eight
manufacturers we interviewed told us that they wanted more guidance from CMS
regarding the dispute resolution process, including more information on how to submit
disputes of discount payments to the TPA.




Page 17                                     GAO-12-914 Medicare Part D Discount Program
CMS Performs Other         CMS performs other oversight activities of the Discount Program that
Oversight Activities and   include maintaining codes, identifying drugs covered under the program,
Reports on Certain         monitoring beneficiary complaints, and conducting audits of
                           manufacturers:
Discount Program
Outcomes                   •    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. 43 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



                           43
                             Labeler codes are the first five digits of the NDC and identify the company that
                           manufacturers a drug. Manufacturers submit this information to CMS to indicate what
                           drugs are covered under the Discount Program.




                           Page 18                                    GAO-12-914 Medicare Part D Discount Program
information from these claims, such as the identity of the pharmacy, may
be used to identify beneficiaries. 44 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. 45

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. 46 CMS officials told us they also
monitor Medicare Part D brand-name drug prices annually. 47 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. 48 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.




44
  Five of the eight manufacturers we interviewed reported that their financial reporting was
impacted by not being invoiced for low-volume claims. Three of the seven plan sponsors
we interviewed also expressed concerns about not receiving payment from manufacturers
for low-volume claims.
45
  See CMS, Medicare Coverage Gap Discount Program – Update on Low-Volume Claims
(Baltimore, Md.: Jan. 27, 2012). CMS officials told us that manufacturers have been
invoiced for all outstanding low-volume claims as of March 2012.
46
 See CMS website, “Plan Payment, Coverage Gap Discount Program, Coverage Gap
Discount Data Spreadsheets,” https://www.cms.gov/Medicare/Medicare-Advantage/Plan-
Payment/CGDP.html (accessed Aug. 1, 2012).
47
  For example, CMS has analyzed changes in drug prices that are reported by plan
sponsors on the Medicare Prescription Drug Plan Finder, an online tool that allows
beneficiaries to compare plan and drug cost information for Medicare Part D plans.
48
  CMS officials stated that they plan to conduct this analysis after CMS reconciles the
differences between its prospective payments and actual expenditures for 2011.




Page 19                                      GAO-12-914 Medicare Part D Discount Program
                            Plan sponsors, PBMs, and drug manufacturers we spoke with had
Plan Sponsors, PBMs,        different perspectives on aspects of the drug pricing and plan design
and Manufacturers           effects of the Discount Program, which include drug prices, rebates,
                            formularies, plan benefit design, and utilization management practices.
Had Different               Most plan sponsors and PBMs told us they believe the Discount Program
Perspectives on             may have been a factor in the rising prices of some brand-name drugs,
Aspects of the Drug         while most manufacturers told us the Discount Program has not affected
                            the prices of brand-name drugs they negotiate with sponsors and PBMs.
Pricing and Plan            The three PBMs we interviewed also told us they observed that some
Design Effects of the       manufacturers decreased the amount of rebates for the brand-name
                            drugs they offered, which they believe occurred as a result of the
Discount Program            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.


Most Plan Sponsors and      Six of the seven plan sponsors and two of the three PBMs we interviewed
PBMs Believe the Discount   told us they believe the Discount Program may have been a contributing
Program May Have Been a     factor in the rising prices of brand-name drugs by some manufacturers. 49
                            Some sponsors and one PBM told us they believe that some
Factor in Rising Drug
                            manufacturers raised prices for their brand-name drugs to recoup the
Prices, While Most          costs of the discounts that they anticipated paying. Some of these
Manufacturers Said It Has   sponsors and one PBM based their observations on reviews of drug
Not                         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.




                            49
                              The remaining plan sponsor we interviewed told us it did not observe changes to brand-
                            name drug prices that it believes occurred as a result of the Discount Program. The
                            remaining PBM told us while it has observed rising brand-name drug prices, the PBM
                            cannot attribute the Discount Program as a factor.




                            Page 20                                    GAO-12-914 Medicare Part D Discount Program
                              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.


PBMs, Plan Sponsors, and      The three PBMs we interviewed told us they observed that some drug
Manufacturers Had             manufacturers decreased the amount of rebates they offered for brand-
Different Observations on     name drugs, which they believe occurred as a result of the Discount
                              Program. 50 One PBM observed that this was occurring among some
the Effects on Rebates as a
                              manufacturers of specialty-tier-eligible drugs. Another PBM also told us it
Result of the Discount        observed these effects beginning as early as 2010, prior to the
Program                       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.



                              50
                                The PBMs were speaking about the rebates they typically negotiate on behalf of the
                              plan sponsors they represent. Manufacturers provide rebate payments to plan sponsors to
                              encourage the use of certain drugs, and rebates result in overall lower Medicare spending
                              for prescription drugs.




                              Page 21                                     GAO-12-914 Medicare Part D Discount Program
                           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     Most plan sponsors and PBMs we interviewed reported that the Discount
PBMs Reported That the     Program has not affected their Medicare Part D plan formularies, plan
Discount Program Did Not   benefit designs, and drug utilization management practices. 51 All seven
                           plan sponsors and two of the three PBMs we interviewed told us that
Affect Formularies, Plan
                           Part D plan formularies have not changed as a result of the Discount
Benefit Design, or         Program. In addition, most of these plan sponsors and PBMs told us that
Utilization Management     the placement of brand-name drugs on plan formularies, including
Practices                  specialty-tier eligible drugs, was not affected by the Discount Program. 52
                           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. 53
                           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


                           51
                             The PBMs were speaking about the formularies of the plan sponsors for which they
                           conduct rebate negotiations.
                           52
                             Two of these plan sponsors said they removed some brand-name drugs from
                           formularies because the manufacturers who produced the drugs did not participate in the
                           Discount Program.
                           53
                             In order to encourage the use of certain drugs among beneficiaries, manufacturers may
                           pay a formulary rebate to a plan for placing a certain drug in a preferred position on the
                           plan’s formulary. In exchange for the rebate, the plan may charge a lower copayment to
                           the beneficiary for the drug in the preferred position, compared to nonpreferred brand-
                           name drugs, resulting in a lower cost for the beneficiary.




                           Page 22                                     GAO-12-914 Medicare Part D 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
Prices Increased at a   coverage gap increased similarly to those used by beneficiaries who did
Similar Rate for        not reach the gap, before and after the Discount Program was
                        implemented in January 2011. 54 From January 2007 to December 2010,
Brand-Name Drugs        prior to the implementation of the Discount Program, the median price
Used by Beneficiaries   (weighted by the utilization of each drug) for the basket of 77 brand-name
in the Coverage Gap     drugs used by beneficiaries in the coverage gap increased 36.2 percent
                        (see fig. 2). 55 When measured across the same period, the median price
and by Those Who        for the basket of 78 brand-name drugs used by beneficiaries who did not
Did Not Reach the       reach the coverage gap also increased at a similar rate of 35.2 percent. 56
                        During the first year with the Discount Program (from December 2010
Gap                     through December 2011), the median prices for the two baskets
                        increased equally at a rate of about 13 percent. 57




                        54
                          We examined whether high-expenditure brand-name drugs used by beneficiaries in the
                        coverage gap may be more susceptible to price increases by drug manufacturers than
                        those used by beneficiaries who did not reach the gap.
                        55
                          The point-of-sale price we analyzed is affected by price changes made by the
                        manufacturer and reflects discounts that Part D plans have negotiated with pharmacies
                        but does not include certain price concessions such as drug manufacturer rebates. While
                        manufacturer rebates lower overall spending for drugs, manufacturer rebates are
                        generally not passed onto the beneficiary at the point-of-sale.
                        56
                          The baskets of brand-name drugs represent those used by beneficiaries in the coverage
                        gap in 2011 and those used by beneficiaries who did not reach the coverage gap in 2011.
                        57
                           The basket of drugs used by beneficiaries in the coverage gap included eight specialty-
                        tier-eligible drugs, which are high-cost drugs, while the basket of drugs used by
                        beneficiaries who did not reach the coverage gap did not include specialty-tier-eligible
                        drugs. During the first year with the Discount Program (from December 2010 through
                        December 2011), the median price for the specialty-tier-eligible drugs increased at a
                        slower rate (8.8 percent) than the non-specialty-tier-eligible drugs (13.4 percent) in the
                        basket of drugs used by beneficiaries in the coverage gap.




                        Page 23                                      GAO-12-914 Medicare Part D Discount Program
Figure 2: Price Indexes for Brand-Name Drugs Used by Medicare Part D Beneficiaries in the Coverage Gap and by Those Who
Did Not Reach the Gap in 2011




                                       Note: The price indexes are for two baskets of high-expenditure brand-name drugs that were used by
                                       Medicare Part D beneficiaries who did not receive a low-income subsidy (LIS). Drugs can be high
                                       expenditure based on their price and utilization. The index values of 136.2 and 154.1 indicate
                                       increases of 36.2 and 54.1 percent in the median prices for the basket of brand-name drugs used by
                                       Medicare Part D beneficiaries in the coverage gap in 2011, from January 2007 to December 2010
                                       and from January 2007 to December 2011. The index values of 135.2 and 153.1 indicate increases of
                                       35.2 and 53.1 percent in the median price for the basket of brand-name drugs used by beneficiaries
                                       who did not reach the coverage gap in 2011, from January 2007 to December 2010 and from January
                                       2007 to December 2011.


                                       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). 58 For example, from December 2009 through December 2010 the



                                       58
                                        The change in median price for 2007 is calculated from January 2007 through
                                       December 2007. In later years, the annual change in median price is calculated from
                                       December through December.




                                       Page 24                                         GAO-12-914 Medicare Part D Discount Program
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.

Figure 3: Annual Percent Change in Price for Brand-Name Drugs Used by Medicare
Part D Beneficiaries in the Coverage Gap and by Those Who Did Not Reach the Gap
in 2011




Note: The percentage changes are for two baskets of high-expenditure brand-name drugs that were
used by Medicare Part D beneficiaries who did not receive a low-income subsidy (LIS). Drugs can be
high expenditure based on their price and utilization. The change in median price from January 2007
through December 2007 is expressed as an annual percentage change.




Page 25                                          GAO-12-914 Medicare Part D Discount Program
                  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
Agency Comments   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.




                  Page 26                              GAO-12-914 Medicare Part D Discount Program
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.




John E. Dicken
Director, Health Care




Page 27                           GAO-12-914 Medicare Part D Discount Program
Appendix I: Methodology for Examining
              Appendix I: Methodology for Examining Brand-
              Name Drug Price Trends



Brand-Name Drug Price Trends

              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. 1 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). 2

              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




              1
               While manufacturers did not know in advance specifically which individual beneficiaries
              would reach the coverage gap in 2011, there may have been an incentive to raise prices
              for brand-name drugs that were often used by beneficiaries who reached the coverage
              gap in prior years or by beneficiaries who were likely to have higher-than-average annual
              drug expenditures.
              2
               We excluded LIS beneficiaries because they are not eligible for the Discount Program.
              To focus on plans available to eligible beneficiaries, we excluded plans with restricted
              enrollment, including employer-sponsored, Demonstration, and Programs of All-Inclusive
              Care for the Elderly. We used CMS’s monthly enrollment plan files, which are publicly
              available, to identify plans with restricted enrollment.




              Page 28                                     GAO-12-914 Medicare Part D Discount Program
Appendix I: Methodology for Examining Brand-
Name Drug Price Trends




PDPs and MA-PDPs who did not reach the coverage gap in 2011. 3 We
identified the top 100 brand-name drugs for each basket by using the
nine-digit national drug code (NDC-9). 4 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. 5 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. 6 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. 7 After identifying the top 100 high-
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



3
 The 2011 PDE data included PDE records submitted to CMS through February 16, 2012,
and did not include all PDE records for 2011 because CMS may accept PDE records for
up to 24 months following the end of the calendar year. CMS officials told us that in the
past they have observed that about 10 to 15 percent of the PDE records were submitted
after the calendar year. CMS officials further noted that these additional PDE records are
often for adjustments for previously submitted claims rather than for new claims. We
included PDE records for claims in the coverage gap period that straddled other periods,
such as the catastrophic coverage period, because the 50 percent discount applies to the
portion of the drug price that falls in the coverage gap.
4
 NDCs are the universal product identifiers for drugs for human use. The Food and Drug
Administration (FDA) assigns the first segment of the NDC, which identifies the firm that
manufactures, repackages, or distributes a drug; the second segment identifies a specific
strength, dosage form, and formulation for a particular drug; and the third segment
identifies package size. Three-segment NDCs are denoted by 11 digits while two-segment
NDCs are denoted by 9 digits, and do not account for package size. Because our analysis
focused on NDCs with the same drug name and strength, we based our analysis on NDC-
9s instead of NDC-11s.
5
 To identify characteristics of brand-name drugs in each basket (e.g., drug name,
strength), we used the July 2011 Red Book, published by Thomson Reuters.
6
 Per CMS guidance for the Discount Program, we excluded PDE records for drugs not
covered under Medicare Part D or that were compound drugs (drugs that are prepared by
a pharmacist who mixes or adjusts drug ingredients to customize a medication). We also
excluded PDE records in which the price the beneficiary paid for a drug may have been
different than the drug price the beneficiary’s plan negotiated (e.g., because the
beneficiary filled the prescription at a pharmacy not in the plan’s network) or the drug was
not included in the beneficiary’s plan formulary.
7
 When plan sponsors or pharmacy benefit managers on behalf of plan sponsors negotiate
drug prices with pharmacies, they typically negotiate discounts off a price that is
established by manufacturers. A vaccination fee is the amount paid to a pharmacy or
physician to cover the cost of administering a vaccination.




Page 29                                      GAO-12-914 Medicare Part D Discount Program
Appendix I: Methodology for Examining Brand-
Name Drug Price Trends




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). 8

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. 9 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. 10 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. 11


8
 For the first basket, we selected high-expenditure drugs that were used while non-LIS
beneficiaries were in the coverage gap and did not include high-expenditure drugs used
by these beneficiaries during the deductible and initial coverage periods, which are prior to
the gap, or those used during the catastrophic coverage period, which is after the gap.
9
  Specifically, we used the Fisher price index, a commonly used price index formula, to
measure the change in price per unit for each basket. The Fisher price index minimizes
the problem of understating or overstating price changes by using the utilization from the
first and last period of our analysis as weights. We used drug utilization from the first and
last month of our analysis as weights. We calculated the ingredient cost per unit by
dividing the drug’s ingredient cost by the quantity dispensed. The quantity dispensed is
the total number of units, grams, or milliliters, and corresponds to the relevant unit of
measurement for a drug.
10
  In 2011, CMS began collecting rebate information at the NDC level for the prior year
(2010). CMS accounts for price concessions, such as rebates, at an aggregate level as
part of its process to reconcile prospective payments with actual drug expenditures for
each Part D plan sponsor.
11
  For example, we made adjustments to the quantity dispensed variable when reported
values were less than 1 or greater than 1,000 (i.e., indicating the quantity may have been
reported in incorrect units).




Page 30                                       GAO-12-914 Medicare Part D Discount Program
Appendix I: Methodology for Examining Brand-
Name Drug Price Trends




We then trimmed the data to remove outliers. 12 To weight the baskets, we
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 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. 13 Twenty-seven brand-name drugs were
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. 14 We considered specialty-tier-eligible drugs
to be those drugs with a median cost that exceeded $600 15 for a 30-day
supply in 2011 (see app. II for a list of the brand-name drugs considered
specialty-tier-eligible). 16




12
  After performing these data edits, and trimming the data, which resulted in the exclusion
of about 4 percent of PDEs from our analysis, the average coefficient of variation (i.e., the
standard deviation divided by the mean) for the ingredient cost per unit variable improved,
decreasing from 23 to 3 percent.
13
  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.
14
  The basket of brand-name drugs used by beneficiaries who did not reach the coverage
gap in 2011 did not include specialty-tier-eligible drugs.
15
 CMS establishes a minimum cost threshold that drugs must exceed before Medicare
Part D plans can place them on a specialty tier, and in 2011 the threshold was $600.
16
  We calculated the cost based on the sum of the drug’s ingredient cost, sales tax,
dispensing fee, and vaccination fee, if applicable.




Page 31                                       GAO-12-914 Medicare Part D Discount Program
Appendix I: Methodology for Examining Brand-
Name Drug Price Trends




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.




Page 32                                    GAO-12-914 Medicare Part D Discount Program
Appendix II: Brand-Name Drugs Included in
              Appendix II: Brand-Name Drugs Included in
              Price Trend Analyses



Price Trend Analyses

              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.

              Table 3: The High-Expenditure Brand-Name Drugs Used by Non-LIS Beneficiaries in
              the Coverage Gap and by Those Who Did Not Reach the Coverage Gap in 2011

              Drug name, strength, route of administration, and dosage form
              27 High-Expenditure Brand-Name Drugs Unique to the Basket of Drugs Used by
              non-LIS Beneficiaries in the Coverage Gap in 2011
                                                              a
              1.   Atripla (600mg-200mg-300mg/oral/tablet)
                                                           a
              2.   Avonex (30mcg/0.5ml/multiple routes/kit)
              3.   Azilect (1mg/oral/tablet)
                                                               a
              4.   Enbrel (50mg/1ml/subcutaneous/solution)
                                                               a
              5.   Enbrel (50mg/1ml/subcutaneous/solution)
              6.   Femara (2.5mg/oral/tablet)
                                                a
              7.   Gleevec (400mg/oral/tablet)
              8.   Humalog (100u/1ml/subcutaneous/suspension)
              9.   Humalog MIX 75 25 (25u/1ml-75u/1ml/subcutaneous/suspension)
                          a,b
              10. Humira
              11. Januvia (50mg/oral/tablet)
              12. Levemir (100u/1ml/subcutaneous/solution)
              13. Lyrica (50mg/oral/capsule)
              14. Namenda (5mg/oral/tablet)
              15. Novolog (100u/1ml/subcutaneous/solution)
              16. Novolog FLEXPEN (100u/1ml/subcutaneous/solution)
              17. Novolog MIX 70 30 (30u/1ml-70u/1ml/subcutaneous/suspension)
              18. Novolog MIX 70 30 (30u/1ml-70u/1ml/subcutaneous/suspension)
              19. Sensipar (30mg/oral/tablet)
              20. Seroquel (25mg/oral/tablet)



              Page 33                                     GAO-12-914 Medicare Part D Discount Program
Appendix II: Brand-Name Drugs Included in
Price Trend Analyses




Drug name, strength, route of administration, and dosage form
21. Seroquel (50mg/oral/tablet)
22. Seroquel (100mg/oral/tablet)
                                  a
23. Tarceva (150mg/oral/tablet)
                                  a
24. Tracleer (125mg/oral/tablet)
25. Zyprexa (5mg/oral/tablet)
26. Zyprexa (10mg/oral/tablet)
27. Zyprexa (2.5mg/oral/tablet)
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
1.   Actonel (35mg/tablet/oral)
2.   Alphagan P (0.1%/ophthalmic/solution)
3.   Avapro (300mg/oral/tablet)
4.   Avapro (150mg/oral/tablet)
5.   Avelox (400mg/oral/tablet)
6.   Azopt (0.1%/ophthalmic/suspension)
7.   Benicar (20mg/oral/tablet)
                                                c
8.   Benicar HCT (25mg-40mg/oral/tablet)
                                                    c
9.   Benicar HCT (12.5mg-40mg/oral/tablet)
                                                c
10. Diovan HCT(25mg-160mg/oral/tablet)
                                                c
11. Diovan HCT(12.5mg-80mg/oral/tablet)
                                                    c
12. Diovan HCT (12.5mg-320mg/oral/tablet)
                                                        d
13. Flovent HFA (0.11mg/inhalation/aerosol)
14. Humulin N (100u/1ml/subcutaneous/suspension)
                                            e
15. Klor Con 10 (10mEq/oral/tablet(ER))
16. Lumigan (0.03%/ophthalmic/solution)
17. Nasonex (0.05mg/nasal/spray)
18. Nevanac (0.10%/ophthalmic/solution)
19. Premarin (0.625mg/oral/tablet)
20. Premarin (0.3mg/oral/tablet)
21. Premarin vaginal (0.625mg/1gm/vaginal/cream)
                                                        d
22. Ventolin HFA (0.09mg/inhalation/aerosol)
23. Vigamox (0.50%/ophthalmic/solution)
24. Vytorin (10mg-40mg/oral/tablet)
25. Vytorin (10mg-20mg/oral/tablet)
26. Vytorin (10mg-80mg/oral/tablet)
27. Xalatan (0.01%/ophthalmic/solution)
28. Zostavax (19400pfu/subcutaneous/powder)




Page 34                                             GAO-12-914 Medicare Part D Discount Program
Appendix II: Brand-Name Drugs Included in
Price Trend Analyses




Drug name, strength, route of administration, and dosage form
50 High-Expenditure Brand-Name Drugs that Overlapped the Basket of Drugs
Used by Non-LIS Beneficiaries in the Coverage Gap in 2011 and the Basket of
Drugs Used by Those Who Did Not Reach the Gap
1.   Actos (30mg/oral/tablet)
2.   Actos (45mg/oral/tablet)
3.   Actos (15mg/oral/tablet)
4.   Advair Diskus 100/50 (0.1mg-0.05m/inhalation/disk)
5.   Advair Diskus 250/50 (0.25mg-0.0m/inhalation/disk)
6.   Advair Diskus 500/50 (0.5mg-0.05m/inhalation/disk)
                                                       e
7.   Aggrenox (25mg-200mg/oral/capsule(ER))
8.   Asacol (400mg/oral/tablet)
9.   Avodart (0.5mg/oral/capsule)
10. Benicar (40mg/oral/tablet)
11. Boniva (150mg/oral/tablet)
12. Celebrex (200mg/oral/capsule)
13. Combivent (0.09mg-0.018mg/inhalation/aerosol)
14. Crestor (10mg/oral/tablet)
15. Crestor (20mg/oral/tablet)
16. Crestor (40mg/oral/tablet)
17. Crestor (5mg/oral/tablet)
                                           f
18. Cymbalta (30mg/oral/capsule(DR))
              g                            e
19. Detrol LA (4mg/oral/capsule (ER))
20. Diovan (160mg/oral/tablet)
21. Diovan (320mg/oral/tablet)
22. Diovan (80mg/oral/tablet)
                                               c
23. Diovan HCT (25mg-320mg/oral/tablet)
                                                   c
24. Diovan HCT (12.5mg-160mg/oral/tablet)
25. Evista (60mg/oral/tablet)
26. Humulin 70 30 (70u/1ml-30u/1ml/subcutaneous/suspension)
27. Januvia (100mg/oral/tablet)
28. Lantus (100u/1ml/subcutaneous/solution)
29. Levemir (100u/1ml/subcutaneous/solution)
30. Lexapro (10mg/oral/tablet)
31. Lexapro (20mg/oral/tablet)
                                       e
32. Lidoderm (5%/topical/patch (ER))
33. Lipitor (20mg/oral/tablet)
34. Lipitor (40mg/oral/tablet)
35. Lipitor (10mg/oral/tablet)




Page 35                                            GAO-12-914 Medicare Part D Discount Program
Appendix II: Brand-Name Drugs Included in
Price Trend Analyses




    Drug name, strength, route of administration, and dosage form
    36. Lipitor (80mg/oral/tablet)
    37. Lyrica (75mg/oral/capsule)
    38. Namenda (10mg/oral/tablet)
                                                      f
    39. Nexium (40mg/oral/capsule (DR))
    40. Plavix (75mg/oral/tablet)
                                                              g
    41. Proair HFA (0.09mg/inhalation/aerosol)
    42. Restasis (0.05%/ophthalmic/emulsion)
    43. Singulair (10mg/oral/tablet)
    44. Spiriva (18mcg/inhalation/capsule)
    45. Travatan Z (0.004%/ophthalmic/solution)
    46. Tricor (145mg/oral/tablet)
    47. Vesicare (5mg/oral/tablet)
    48. Vesicare (10mg/oral/tablet)
    49. Welchol (625mg/oral/tablet)
    50. Zetia (10mg/oral/tablet)
Source: GAO analysis of 2007 to 2011 Prescription Drug Event Data from CMS and July 2011 Red Book data.

Notes: The drug strength indicates how much of the active ingredient is present in each dosage. The
route of administration is the way of administering a drug to a site in a patient. The dosage form is the
physical form in which a drug is produced and dispensed, such as a tablet, a capsule, or an
injectable. Brand-name drugs were selected using the nine-digit national drug code (NDC-9).
Levemir, Novolog MIX 70 30, and Enbrel are listed twice with the same strength, route of
administration, and dosage form because each had two different NDC-9s.
a
 We characterized these drugs as specialty-tier-eligible drugs because they had a median cost that
exceeded $600 for a 30-day supply in 2011. CMS establishes a minimum cost threshold that drugs
must exceed before Medicare Part D plans can place them on a specialty tier, and in 2011 the
threshold was $600.
b
 Humira is a biologic that comes as a solution that is injected. Biologics replicate natural substances
such as enzymes, antibodies, or hormones, and according to the Food and Drug Administration, most
biologics are complex mixtures that are not easily identified or characterized.
c
    HCT=hydrochlorothiazide.
d
    HFA=hydrofluoroalkanes.
e
    ER=extended release.
f
    DR=delayed release.
g
    LA=long acting.




Page 36                                                       GAO-12-914 Medicare Part D Discount Program
Appendix III: How the Discount Program
              Appendix III: How the Discount Program Works
              at the Point-of-Sale for Brand-Name Drugs



Works at the Point-of-Sale for Brand-Name
Drugs
              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. 1 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. 2 The entire cost of the drug, which
              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.




              1
               42 U.S.C. § 1395w-114a(g)(6); 77 Fed. Reg. 22072, 22080, 22172 (Apr. 12, 2012) (to be
              codified at 42 C.F.R. § 423.2305).
              2
               Both the dispensing and vaccination fees apply to the beneficiary’s out-of-pocket
              spending. Beginning in 2013, CMS will require that beneficiaries be responsible for only a
              portion of the drug dispensing fee for all applicable drugs while they are in the coverage
              gap. This portion is commensurate with the beneficiary coinsurance (e.g., 47.5 percent
              coinsurance for brand-name drugs in 2013). The plan sponsor will be responsible for
              paying the remaining portion of the dispensing fee. CMS, Announcement of Calendar
              Year (CY) 2013 Medicare Advantage Capitation Rates and Medicare Advantage and
              Part D Payment Policies and Final Call Letter, at 32, (Apr. 2, 2012).




              Page 37                                      GAO-12-914 Medicare Part D Discount Program
Appendix III: How the Discount Program Works
at the Point-of-Sale for Brand-Name Drugs




Figure 4: Hypothetical Example: A Non-LIS Beneficiary in a Standard Benefit Plan
Purchasing a Brand-Name Drug While in the Coverage Gap in 2011




Note: The plan-negotiated drug price is the price that a plan sponsor, or pharmacy benefit manager
on behalf of the plan sponsor, has negotiated for the beneficiary’s plan.




Page 38                                          GAO-12-914 Medicare Part D Discount Program
Appendix IV: Comments from the
             Appendix IV: Comments from the Department
             of Health and Human Services



Department of Health and Human Services




             Page 39                                     GAO-12-914 Medicare Part D Discount Program
Appendix V: GAO Contact and Staff
                  Appendix V: GAO Contact and Staff
                  Acknowledgments



Acknowledgments

                  John E. Dicken, (202) 512-7114 or DickenJ@gao.gov
GAO Contact
                  In addition to the contact named above, individuals making key
Staff             contributions to this report include Rashmi Agarwal, Assistant Director;
Acknowledgments   Zhi Boon; Robert Copeland; Pam Dooley; Seta Hovagimian; and Laurie
                  Pachter.




                  Page 40                             GAO-12-914 Medicare Part D Discount Program
Related GAO Products
             Related GAO Products




             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.




(290964)
             Page 41                              GAO-12-914 Medicare Part D Discount Program
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