Report to the President: Prescription Drug Coverage, Spending, Utilization, and Prices.. Pricing for Federal Facilities and Agencies

04/01/2000

Prices paid to manufacturers by the VA, other federal agencies, and certain other entities, such as Indian tribal governments, are set by the Federal Supply Schedule (FSS). Under the Veterans Health Care Act of 1992, manufacturers must make drugs available to covered entities at the FSS price as a condition of eligibility for Medicaid reimbursement.

FSS prices are negotiated with manufacturers by the VA.15 In general, the FSS price may be no higher than the lowest contractual price charged by the manufacturer to any nonfederal purchaser under similar terms and conditions. In order to determine this price, manufacturers supply the VA with information on price discounts and rebates offered to different customers and the terms and conditions involved. Under certain conditions, the VA may accept an FSS price that is higher than the price offered to some nonfederal customers. According to the GAO, average FSS prices are more than 50 percent below the nonfederal average manufacturer's price.16 This result is somewhat lower than the relationship shown in Table 3-2 based on the CBO study.

For certain drugs sold to the VA, the Department of Defense, the Public Health Service, and the Coast Guard, the manufacturer must charge the lesser of the FSS or a "federal ceiling price."17 The federal ceiling price is set at 76 percent of the average manufacturer's price; this limit may be higher or lower than the FSS. The rule applies only to brand name drugs without competition or innovator multiple-source drugs.18

In the example in Table 3-1, the federal supply schedule price of $24 is about 60 percent of the manufacturer's price and well under the various retail prices charged to different types of customers. Not surprisingly, it is fairly close to the $30 that represents the lowest price that might be achieved by insurers and PBMs (and Medicaid) in cases where they get the largest manufacturer rebates. This makes sense for a "best contractual price" standard. If the table could represent the full range of prices achieved by some buyers for some drugs, there would probably be cases where other third parties achieved prices below this FSS price.

More generally, the fact the FSS price is generally lower than other prices may have a variety of explanations. These include the small share of the market that federal purchasers represent (less than 2 percent), the effectiveness of the VA as a price negotiator, and the interest that manufacturers may have in making sure their drugs are available to federal facilities and agencies (including VA hospitals that train a large number of physicians).

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