GAO Reports on Medicare's Expensive Prescription Drug Spending

Policy Memo
Monday, January 29, 2018

A recent report from the Government Accountability Office (GAO) highlights how current law can boost the costs of certain expensive drugs through Medicare.

The report focuses on the pricing of Medicare Part B drugs, which are usually administered under a doctor’s supervision. In 2015 Medicare spent $26 billion on Part B drugs.

“By law, the amount Medicare pays for a Part B drug is generally based on this drug’s market price, no matter how high or low that price may be,” the GAO explains. “Therefore, when Medicare accounts for a large share of a drug’s market, the manufacturer may have less incentive to price the drug competitively.”

Unlike Medicare, private insurers can respond to higher drug prices by modifying coverage or changing its benefit package.

In 2015 Medicare’s fee-for-service program represented at least half of the market for 22 of the 84 most expensive Part B drugs that GAO analyzed. “These 22 drugs collectively represented $7.4 billion in spending -- or about 30 percent of all Medicare spending on Park B drugs in 2015,” the GAO said.

Blog Post

Lawmakers Forget Incentives Matter on Prescription Drugs

Monday, May 02, 2016

Health care cost-control efforts in the United States can often be described simply as “changing incentives.” The focus on incentives can be traced to two main circumstances:

1) The majority of politicians have opposed efforts to reduce costs simply through government price-setting, a mechanism widely used around the world to control costs.

The growth of Medicare spending is one of the most difficult fiscal challenges facing the federal government, in part because of the aging of the population.

The GAO report is a reminder that the health system needs to move away from the fee-for-service approach because it can encourage unnecessary procedures and medications.

Elected officials, who in the past have thwarted efforts at experimentation on how to better align incentives on Medicare prescription drugs and to move away from fee-for-service more generally, need to recognize that transforming Medicare to operate more effectively and efficiently is crucial to the nation’s fiscal condition and the overall health care system.