Lowering Drug Prices in Medicare

High drug costs are burdening seniors with excessive out-of-pocket expenses and straining the Medicare program’s finances. A recent study found that the U.S. pays more than two and a half times more for drugs than 32 other countries do.

Medicare beneficiaries’ average out-of-pocket costs for certain brand name drugs rose by 40 percent between 2011 and 2015. The list price — which does not include discounts to Medicare drug plans but is the basis for Medicare beneficiaries’ Part D cost sharing — of 79 brand-name drugs rose by more than 16 percent while average out-of-pocket costs went up by more than 3 percent from 2015 to 2017. This trend is clearly unsustainable and some policy makers are looking for ways to rein in drug costs in the Medicare program.

Three policy approaches to lowering drug costs that some members of Congress are actively considering are: 1) allowing the government to negotiate directly with manufacturers in the Medicare Part D program, 2) placing inflationary spending caps on drugs, and 3) so-called reference pricing.

The National Committee supports H.R. 3, the Elijah Cummings Lower Drug Costs Now Act, which uses all three of these approaches.

Drug Price Negotiation

The Medicare Modernization Act of 2003 (P.L. 108-173) created the Medicare Part D prescription drug program, which is administered through private insurance plans. The law prohibits the Medicare program from negotiating the price of drugs with manufacturers.  Instead, negotiations with drug manufacturers are conducted by insurers. This structure spreads the bargaining power of the Medicare program across multiple private plans. As a result, the federal government pays more for Medicare drugs than it does for drugs purchased through other federal programs such as the Department of Veterans Affairs (VA) and Department of Defense health systems, where the government directly negotiates with manufacturers in exchange for placement on its formulary[i], or Medicaid, which requires a manufacturer discount in the form of a mandatory rebate. The Congressional Budget Office found that the average price per prescription that Medicare Part D pays is almost twice what Medicaid pays for high-priced specialty drugs ($3,600 compared to $1,920).

H.R. 3 would:

  • allow the Secretary of Health and Human Services to negotiate for up to 250 drugs the maximum fair price that pharmaceutical manufacturers could charge to Part D enrollees without incurring civil monetary penalty worth 10 times the amount of any overcharge.
  • require the Secretary to negotiate a minimum of 25 drugs increasing to 50 drugs.
  • establish Medicare Parts B and D prescription drug inflation-based rebates, to ward off excessive price hikes for drugs that have not been negotiated.

Drug Inflation Rebates

While still allowing manufacturers to set the initial price of the drugs, these proposals would require that manufacturers rebate to Medicare the amount that drugs rise above the rate of inflation. Inflation limitations have some bipartisan support; the Prescription Drug Pricing Reduction Act of 2019, which passed the Senate Finance Committee in July 2019 was written by Senators Charles Grassley (R-IA) and Ron Wyden (D-OR).   The Finance Committee-passed bill would have placed limits on Part B (the drugs people take in physician offices, such as oncology drugs) and Part D (pharmacy drugs).  Unfortunately, then-Majority Leader Mitch McConnell (R-KY) did not allow the Grassley-Wyden bill to be considered by the full Senate. While there are differences in approaches to inflation caps, this may be an area where bipartisan agreement can be reached.

Reference pricing

Reference pricing is when a drug purchaser sets a limit — or reference price — for what it is willing to pay for a drug. For example, the Trump Administration had proposed tying payment for Medicare Part B drugs to an international pricing index. The government would not pay more for the drug than the reference price. H.R. 3 also includes a reference pricing provision; the negotiated price between HHS and the manufacturer is required to fall between the lowest price among selected reference countries and 120 percent of the average price across reference countries.


The National Committee supports H.R. 3’s provisions allowing the Medicare program to negotiate prices directly with drug manufacturers and requiring them to rebate to the government the amount by which drug prices in Part B and Part D exceed inflation.  We also support H.R. 3’s provision limiting prices by an international reference price. These measures will create savings that can be used to add hearing, dental and vision coverage to Medicare.

The National Committee also supports policies that would lower drug costs for all drugs, not just those used by Medicare beneficiaries.  We urge Congress to enact reforms that would reduce expansive patent and regulatory marketing monopolies to allow generic drug competitors to come to market sooner and drive down drug costs. For example, we support shortening the marketing exclusivity (a monopoly period distinct from a patent granted through the Food and Drug Administration approval process) for biologics from 12 years under current law to seven. We favor eliminating excessive evergreening of patents and banning anti-competitive pay-for-delay agreements where brand drugs pay generics to stay off the market.


Government Relations & Policy, June 2021


[i] A formulary is a list of generic and brand name prescription drugs covered by a health plan.