Pricing and Reimbursement within the US Public Healthcare System – Part One, Medicare

photopin_oldmanautumn_smallby Emily Fielding

The US Health System has historically had a very strong emphasis on the private sector. Unlike in many other developed nations, Americans do not have a choice between public and private coverage – only those who are deemed incapable of obtaining private coverage may have public coverage. The Affordable Care Act increases the pool of individuals eligible for public coverage. This means more US residents will be in a position to utilize medical services following implementation in 2014.

Public health coverage operates under various programs. Medicare is for those over 65 years of age, the disabled and those with end-stage renal disease or motor neuron disease. Under Medicare, enrollees are automatically entitled to Part A, Hospital Cover, but not prescription drug coverage. To receive drug coverage, patients must also be paying 2 monthly premiums – one for Part B, doctor services and outpatient care ($104.90 in 2013), and another for Part D, which is specific for drug coverage for those covered by Part B. This drug coverage was only added in 2006, and is run by private plans that vary in cost and coverage but must be approved by Medicare. As almost half of these patients are reported as having 3 or more chronic conditions, this addition was sorely needed.

The Affordable Care Act introduced an obligatory discount for brand manufacturers participating in Medicare Part D. Those drugs that fall in the Medicare coverage “donut hole” and would require payment of full price out of pocket, must now be offered to enrollees at a 50% discount. These are normally small molecule drugs and biologics. While this is a financial loss for the relevant biopharma companies, it is accepted as a much better option than entering price negotiations for all drugs under Medicare.

It’s important to note that Medicare Coverage excludes many out-of-pocket expenses, and there is no cap on how much a patient spends per year, potentially reducing a patient’s inclination to be compliant when money becomes tight. For this reason, 90% of Medicare enrollees choose to have supplemental insurance to help cover out-of-pocket expenses from Medicare. 22% choose to enroll in Medicare Advantage (Part C), for which the premium is more expensive than the Part B monthly cost, but it gives the beneficiaries more options. 79% of Medicare Advantage plans offer drug coverage, but mostly for generic drugs only.

Drug Price can be calculated 8 different ways in the USA, which you can view here in the glossary. The choice of method to calculate reimbursement levels is important, as it can result in financial problems for Medicare if the method used leads to overpaying for drugs. Cost effectiveness studies are very difficult to complete in the US due to the fragmented nature of the market. The recent health reforms established a comparative effectiveness body known as the Patient-Centered Outcomes Research Institute that has already approved 51 studies. This represents the US recognizing the value of institutions such as NICE in the UK. However, the results of these studies will not form mandates or guidelines.

The public programs retain some buyer power in negotiating discounts and rebates from Pharma. A key reimbursement tool to be aware is the use of formularies, which determine which drugs can be dispensed to enrollees. A pharmacy & therapeutics committee designs the Medicare Formulary with consideration given to the many relevant stakeholders. Another tool is instituting prior authorization and step therapy to discourage prescribing of more expensive drugs, and pharmacist brand substitution to increase use of generics.  It’s important that pharma companies keep patient co-pays in mind as in combination with generic-name prescribing higher prices will have a negative effect on sales.

The introduction of the Independent Payment Advisory Board may be the Obamacare measure of most concern to Pharma. For the first time, a US Government agency will be charged with the task of achieving cost savings in Medicare expenditure and will have the ability to make changes to the Medicare program without requiring an act of Congress. However, Congress can overrule agency decisions with a supermajority, or if they can come up with a comparable solution to the one proposed that delivers the same cost savings. Thus, the threat of even lower prices for products under Medicare remains. IPAB will also be submitting to Congress recommendations on how to slow the growth in total private health care expenditures. More on the private healthcare systems in an upcoming installment of Hot Topics in Biopharma.


Sinclair, A et al (2010) Strategic Analysis – US Pharmaceutical Market Overview, Reference number: DMHC2621, Datamonitor 

DeNavas-Walt, C, Proctor, BD and Smith, JC (2012) “Income, Poverty, and Health Insurance Coverage in the United States: 2011” U.S. Census Bureau, Current Population Reports, P60-243, U.S. Government Printing Office, Washington, DC

Schlosberg, C & Jerath, S (1999) Fact Sheet: Prescription Drug Coverage Under Medicare NHelp Available from:

2018-04-24T10:36:00+00:00 agosto 30th, 2013|Market Access|