Some Federal Programs Spend Billions More for Drugs

Drug purchases on behalf of the federal government account for more than a quarter of the $260-billion prescription industry, but prices for medication vary widely based on which department buys them, according to a new Government Accountability Office report.

Medicaid, which works through state-run programs that provide healthcare to the poor, pays the least for prescription drugs, while Medicare Part D shells out the most for brand-name medications and the Department of Defense pays the most for generics, Bloomberg Businessweek reported.

The variation in price stems from drugmaker rebates, which result in slashed prices for some deals and higher rates for others. If the Medicaid rate applied across the board, the government could potentially save billions of dollars if drugmakers didn't boost prices in other places to mitigate the lost revenue.

Government programs spent more than $71 billion on retail prescription drugs in 2011. Medicare Part D, the program's drug component, covered 33 million Americans, while State Medicaid programs insured 71.5 million low-income people. For the military, around 9.7 million people were covered.

Discounts often amount to a "shell game" as cut prices in one place boost higher prices for another program, Businessweek reported.

"The magnitude of these potential offsetting price increases could depend on a number of factors," the GAO wrote. "For example, if a large federal program with many beneficiaries became eligible for the discounts, manufacturers might choose to raise prices by a greater amount than they would if a smaller program with fewer beneficiaries became eligible. Manufacturers might choose to raise prices more for drugs with fewer competitors than for drugs with many competitors.

"Furthermore, because federal prices are generally based on prices paid by nonfederal purchasers such as private health insurers, manufacturers would have to raise prices to those purchasers in order to raise the federal prices."