Federal Regulation of Prescription Drugs in the United States

Drug access and transparency are prioritized while cost takes a back seat H. Neil Lund and Marilyn McGaffin

Photo: iStock.com/Petmal

The Society of Actuaries (SOA) 18|11 Initiative explores all aspects of the U.S. health care system to aid actuaries in understanding and addressing health care issues. This article provides a high-level overview of federal regulation of the pharmacy industry in the United States from the aspects of access, quality, cost and transparency.

At the federal level, drugs are regulated primarily through the U.S. Department of Health and Human Services (HHS). Within HHS, the two departments that are most involved are the U.S. Food and Drug Administration (FDA) and the Centers for Medicare & Medicaid Services (CMS).


Every country has some type of pharmaceutical regulatory institution whose aim is to protect its citizens from the detrimental effects of harmful drugs. In the United States, that regulatory body is the FDA. The FDA is responsible for protecting and promoting public health through the control and supervision of food safety, tobacco products, dietary supplements, prescription and over-the-counter pharmaceutical drugs (medications), vaccines, biopharmaceuticals, blood transfusions, medical devices, electromagnetic radiation-emitting devices (ERED), cosmetics, animal foods and veterinary products.

Within the FDA is the Center for Drug Evaluation and Research, which is responsible for approving new drugs, generic drugs and over-the-counter drugs. The Office of Prescription Drug Promotion reviews and regulates prescription drug advertising and promotion through surveillance and issuance of letters to pharmaceutical companies.

Although the FDA can approve a drug for use and approve the advertising materials used, it has avoided issues regarding the pricing of prescription drugs until the Affordable Care Act (ACA) of 2010. The ACA contains many provisions that affect prescription drug approval and pricing. The Biologics Price Competition and Innovation Act, which is part of the ACA, provides innovative biologic companies with 12 years of data exclusivity for their products. The ACA also created the Center for Medicare and Medicaid Innovation and did away with lifetime maximums, which were often in the $1 million range.


CMS’s primary mission is to administer Medicare, Medicaid, Children’s Health Insurance Program (CHIP) and health insurance portability standards. One of its Medicare roles is to oversee the Medicare Part D program through the implementation of the Medicare Modernization Act of 2003 (MMA) and the ACA.

Prescription Drug Background Data

To frame the discussion, it is helpful to examine Medicare Part D experience from 2018.1 Part D is exclusively a federal program unlike Medicaid and ACA coverage, which are federal/state partnerships. CMS maintains a robust database of Part D drug usage. The Part D data is based on more than 1.5 billion actual scripts, 2.2 billion 30-day equivalent prescriptions (many prescriptions are written for an extended supply, commonly 90 days, so using a 30-day equivalent puts all prescription counts on a common basis) and $168 billion of drug spend.

As illustrated in Figure 1, more than 88 percent of the scripts are for low-cost generic drugs, but they account for less than 20 percent of the spend. 42.5 percent of the spend is generated by 1 percent of the scripts. Specialty drug spend correlates with Medicare Part D reinsurance. Medpac, in its June 2020 Report to Congress,2 noted that in 2007, reinsurance Part D spending was 5 percent of total spend for non-low-income members (non-LIS). In 2017, the spend was 23 percent—more than a four-fold increase. For low-income (LIS) lives, the corresponding figures were 21 percent for 2007 and 40 percent for 2017. High costs are driven by a relatively low percentage of the scripts.

Figure 1: Medicare Part D Drug Distributions, 2018

Drug Type Distribution by Scripts Distribution by Cost Average Cost/Script
Generics 88.6% 19.6% $16.53
Brands 10.3% 37.8% $274.79
Specialty 1.1% 42.5% $2,813.09
Total 100.0% 100.0% $74.62

Source: CMS 2018 PDE data. Scripts based on 30-day equivalent.


The FDA supports and encourages drug access by approving new drugs, generic drugs and over-the-counter drugs. See the article “Traditional Drug Development Process” for a broader discussion of the development process and FDA oversight. The FDA approval process focuses on clinical efficacy and safety, and therefore it should be considered a process of creating access to new drugs or generics. The process does not consider the cost of the drug.

The FDA has an expedited approval process to encourage the development of novel drugs—drugs that are innovative or provide new therapies. In 2019, the FDA approved 48 such drugs.3 These drugs are an example of encouraging access to new therapies or therapies for which there were no approved drugs in the United States—but with no consideration of drug cost.

Using internet searches (primarily GoodRx), we developed a distribution of costs for 41 of these novel drugs. (As of July 1, 2020, no pricing information was available for seven of the drugs.) Figure 2 shows that only one drug approved via the expedited process was low cost (less than $100 for a 30-day supply) and only eight cost less than $1,000 per month. It is easy to conclude the FDA’s expedited process encourages the development of new therapies, thereby increasing access, but with the tradeoff of very costly treatments.

Figure 2: Price Distribution for Novel Drugs Approved in 2019

Drug Price – 30 Day Count
Less than $100 1
$100–$499 2
$500–$999 5
$1,000–$4,999 8
$5,000–$9,999 2
$10,000–$19,999 14
$20,000–$49,999 8
More than $50,000 1

CMS, through programs such as Medicare Part D, also encourages access through several directives. The first is through formulary oversight and approval. CMS formally reviews and approves all Part D formularies and enforces minimum requirements for formulary inclusion (such as at least two drugs per class), six protected classes where essentially all drugs must be on the formulary, and tiering standards where many classes must have at least one drug on a preferred tier.

CMS also approves utilization management (UM) practices. UM practices and rules—which encompass prior authorization, quantity limits and step therapy—all are examined to ensure members have access to the appropriate therapies. The intent is that every formulary provides relatively broad access to therapies without excessive restrictions. For Medicaid and ACA coverage, CMS also provides minimum formulary guidelines. However, these programs widely operate at the state level.

CMS also supports access through pharmacy network standards. Networks must meet density standards based on member distance to network pharmacies with urban, suburban and rural categorizations. Furthermore, for “standard” networks, CMS enforces an “any willing pharmacy” rule. Any pharmacy willing to meet a plan’s published terms and conditions for standard network pharmacies must be included in the network. The rule is not enforced for the preferred pharmacy portion of the network.


Quality can be defined through efficacy and safety. As previously noted, efficacy and safety are key elements of the new drug approval process. They also are monitored by the FDA post-approval, with a particular focus on safety. The FDA can and has removed drugs from the market.

The FDA’s Center for Drug Evaluation and Research also oversees the safety of the drug supply chain for drugs manufactured in or imported into the United States. In 2019, only about 28 percent of drug active ingredients and 47 percent of finished dosage forms were produced in U.S. facilities.4 Among other activities, the Center inspects manufacturing facilities worldwide—about 58 percent of the inspections in 2019 were foreign facilities. The FDA rates the risk of manufacturers and inspects high-risk facilities approximately every 2.1 years and low-risk facilities every 3.2 years.5

CMS oversees quality in the Part D program through guidance on high-risk medications and the use of safety edits in the Formulary Reference File (FRF). The FRF lists all drugs that are eligible to be covered under Part D formularies. Not all drugs listed on the FRF need to be included in Part D formularies. Typically, formularies cover about 55 percent of the FRF drugs. CMS also provides special guidance for what it considers to be high-risk drugs for seniors and requires safety edits (utilization management, such as prior authorizations and/or quantity limits) for certain drugs.


The federal government does not regulate drug pricing. However, it encourages the development of generic drugs through an abbreviated approval process. For example, the brand Lipitor (a statin) was priced at about $230 for a 30-day supply. The generic, atorvastatin, is priced under $25—nearly a 90 percent savings.

Generics can be an effective cost reducer when:

  • There is a clear cost-effective path to approval of the generic
  • There is a sufficient volume of sales to attract generic manufacturers
  • Multiple manufacturers actually produce the generic

In 2019, then-FDA commissioner Scott Gottlieb6 proposed revisions to the abbreviated new drug application (ANDA) process to facilitate broader efforts in the development of generic competition. (The ANDA process is an abbreviated process for generics to gain FDA approval by demonstrating equivalence to a brand drug.) The proposals would increase transparency for generic approvals, shorten timelines and create alternative demonstrations for complex drugs, all under the belief that generic competition can lower drug prices.

In 2018, Alex Azar, the head of HHS, made the pricing of prescription drugs an area of focus. In May 2018, HHS released its American Patients First Blueprint to Lower Drug Prices and Reduce Out-of-Pocket Costs,7 and since then, the administration has been rolling out a range of policy proposals on the topic of drug prices. Some of these proposals, like the adoption of an international reference pricing system in Medicare Part B, are quite radical. Other proposals touch upon the inclusion of pharmaceutical list prices in television advertising.

These proposals languished until July 2020 when then-President Trump issued four executive orders covering rebate reform, drug importation, pass-through of 340B discounts for insulins and EpiPens, and most favored nation status for Medicare Part B drugs. The orders direct the secretary of HHS to implement them subject to a limitation that such programs may not increase government spending, member premiums or member out-of-pocket costs. These limitations create a formidable obstacle for several of the orders, particularly rebate reform and importation. The orders do not contain any detail, so the release of proposed rules by HHS will be critical in determining the impacts.

The Medicare Payment Advisory Commission (Medpac) describes itself as a “nonpartisan legislative branch agency that provides the U.S. Congress with analysis and policy advice on the Medicare program.” Medpac proposed a much different approach for encouraging the use of generics among LIS Part D members.8 Essentially, for nonpreferred and nonformulary drugs, Medpac proposed raising the copay for LIS members—under the expectation that the higher copay for these drugs would drive prescribers and members to use lower-cost generics.


Transparency is a multifaceted focus of the federal government. Bills in Congress are published in the Federal Register and are open to comment. Changes in regulation also are published with a disclosed comment period. On occasion, the government will solicit comments on a topic. The solicitations are public and also contain a formal comment period.

The Federal Trade Commission (FTC) oversees over-the-counter drug advertising. The drug advertising regulation contains two broad requirements:

  1. A company may advertise or promote a drug only for the specific indication or medical use for which the FDA approved it.
  2. An advertisement must contain a “fair balance” between the benefits and the risks (side effects) of a drug.

Medicare Part D plan sponsors must be transparent with CMS. CMS requires significant detailed reporting from the plans. For example, every drug claim is reported in detail to CMS via the prescription drug event (PDE) file on a biweekly submission. Similarly, but only once per year, plans must submit rebate and other information at a drug level. Under strict data use agreements and often with fees, CMS, through public use and other files, makes limited data available for analysis. Because of confidentiality issues, CMS does not make rebate information available to the general public.

CMS also makes a very helpful transparency tool—Plan Finder—publicly available. Members can use Plan Finder to enter all of the drugs they take and their preferred pharmacy into the tool. Plan Finder then returns the estimated total cost of the plan (premium plus drug copays) for the year in rank order from lowest to highest cost. This is an extremely powerful tool, especially during the annual enrollment period.

Several other efforts to increase price transparency throughout the pharmacy ecosystem are underway at the federal level. In 2017, the Drug Price Transparency in Communications Act9 proposed civil fines for not showing the 30-day supply wholesale acquisition cost.10 However, a federal court blocked implementation, citing a lack of statutory authority.11

A Medicare drug pricing dashboard to make price increases and generic competition more transparent has been suggested.12 Experimentation with value-based purchasing/contracting has been proposed as a means of managing drug pricing transparency for seniors and government programs. Some also have advocated for changes to Medicare Part D to enable the federal government to negotiate drug prices directly with manufacturers or to empower plan sponsors with greater negotiation leverage as they negotiate with manufacturers. Changes in whether/how rebates are negotiated and/or applied for drugs administered through federal programs also have been proposed.

Takeaways for Actuaries

The federal regulation of drugs focuses on access and quality. Cost has taken, at best, a secondary role. Transparency, with limits, also is promoted by the federal government.

Actuaries can and should participate in the federal drug price transparency efforts. Congressional bills and proposed changes in regulations often are quite detailed and far-reaching—therefore, significant analysis is often required. Actuaries should work with their organization’s government affairs department (or similar area) to analyze and draft responses to the various bills or proposals. Analyses should look at the impact on all constituents, not just narrowly on a single organization. Well-constructed examples are helpful when incorporated into public comments. The government does listen and use the responses. The public use files and Plan Finder can be useful data sources for actuarial analysis.

H. Neil Lund, FSA, FCA, MAAA, is retired chief actuary of CVS Health.
Marilyn McGaffin, ASA, FLMI, MAAA, is a Medicaid actuary for Moda Health and a member of the Social Insurance and Public Finance Section Council of the Society of Actuaries.

Statements of fact and opinions expressed herein are those of the individual authors and are not necessarily those of the Society of Actuaries or the respective authors’ employers.

Copyright © 2021 by the Society of Actuaries, Chicago, Illinois.