Medicare Part D pays needlessly high brand-name drug prices

Mirror, Mirror on the Wall: Medicare Part D pays needlessly high brand-name drug prices compared with other OECD countries and with U.S. government programs

By Marc-André Gagnon, PhD. and Sidney Wolfe, MD.
Carleton University, School of Public Policy and Administration and Public Citizen, July 23, 2015

With $69.3 billion in prescription drug spending in 2013, Medicare Part D alone represents approximately 7% of the $993 billion global prescription drug market. Around 58% of Medicare Part D spending on prescription drugs is paid to brand-name manufacturers.

Despite its size, Medicare Part D is not allowed to “interfere with the negotiations between drug manufacturers and pharmacies and [Part D plan] sponsors” (P.L. 108-73, Section 1860D-11). Plan sponsors can obtain substantial rebates from both drug manufacturers and pharmacies, but the federal program is prohibited from leveraging its purchasing power to realize economies of scale due to this non- interference clause.

As this policy brief will show, by using previously unavailable data comparing U.S. brand-name drug prices with those of all other countries members of the Organization for Economic Co-operation and Development (OECD), Medicare Part D needlessly pays significantly higher prices than any other comparator countries. Moreover, even in comparison to other U.S. government programs such as Medicaid and the Veterans’ Benefits Administration (VBA), significantly higher prices are paid by Medicare Part D.


1. After including rebates, brand-name drugs cost Medicare Part D 198% of the median costs for the same brand-name drugs in the 31 OECD countries.

2. Medicare Part D pays on average 73% more than Medicaid and 80% more than the Veterans Benefits Administration (VBA) for brand-name drugs.

3. Medicare Part D would save from $15.2 billion to $16 billion a year if it could secure the same prices that Medicaid or VBA, respectively, receives on the same brand-name drugs.

4. While Medicaid and VBA often are used as benchmarks because of the rebates or discounts they secure, even these organizations pay higher prices than many OECD countries.

5. Under current Medicare Part D pricing, non-innovative “me-too” drugs are priced as much or more than older, equally effective versions. By currently paying inflated prices for drugs that do not provide value for money, Medicare Part D artificially increases the returns and incentives for non-innovative “me-too” drugs to the detriment of new innovative medicines for unmet needs.

6. Reducing brand-name drug prices would reduce the high level of cost-related non-adherence (people not filling their prescription for financial reasons) found in Part D, by reducing beneficiaries’ premiums and co-pays. In addition, since the government pays for the majority of Medicare Part D, taxpayers’ contribution would decrease by at least $11 billion every year.

From the Conclusions and Policy Considerations

The after-rebate prices Medicare Part D plan sponsors pay for brand-name drugs remain significantly higher than the current market prices found in other countries or in other programs such as Medicaid or VBA. Medicare Part D would save between $15.2 billion and $16 billion a year if it could obtain the same manufacturer prices that Medicaid or VBA, respectively, obtains for the same brand-name drugs. Lower brand-name drug prices for Medicare Part D not only would generate savings, but, by increasing patient access to prescribed drugs, it also could improve adherence to treatments by reducing the high level of cost-related non-adherence found in Medicare Part D.

While Medicaid and VBA obtain almost equivalent brand-name price levels, they create completely different incentives for pharmaceutical R&D. The unconditional “basic rebates” of Medicaid foster the current business of developing me-too drugs while creating an incentive to artificially inflate official prices. The proactive drug formulary management of VBA maximizes therapeutic value for every dollar spent and thus provides greater incentives for producing more innovative products.

The main argument against managed formularies is that such formularies restrict patients’ choices. Indeed, managed formularies do not reimburse all new drugs, only those that provide value for money. However, freedom of choice is never at stake, since patients can decide to pay out of pocket for the drugs or treatments they desire, even if clinical evidence shows that these treatments do not provide therapeutic value for money. A managed formulary for prescription drugs does not reduce freedom of choice; it only reduces the freedom to needlessly waste taxpayers’ money.

Policy Brief (19 pages):



By Don McCanne, MD

This report compares drug spending in the United States with other OECD nations and contrasts the higher prices in Medicare Part D with the lower prices in the Veterans’ Benefits Administration (VBA) and the Medicaid programs. Although supporters of the Medicare Part D drug program continue to tout the savings from the plans, this report shows us how we would be far better off if we used a public purchasing program such as that of the VBA instead of depending on competition of private pharmacy benefit managers wherein the government is prohibited from interfering in negotiations.

This report provides data that can be used to refute PhRMA’s contention that “fundamentally alter(ing) the structure of the successful Medicare Part D program would hurt both taxpayers and beneficiaries” (WSJ Pharmalot, July 23). To the contrary, it would help both taxpayers and beneficiaries.