7.3 US Health Care Systems
Key Takeaways
- US health care is financed through a patchwork of Medicare, Medicaid, employer-sponsored insurance, ACA exchanges, VA/DoD, and out-of-pocket payments.
- Medicare Part D provides outpatient drug coverage through private plans with formularies organized into tiers, with the coverage gap largely closed under the ACA.
- Pharmacy Benefit Managers (PBMs) administer drug benefits, manage formularies, negotiate manufacturer rebates, and use MAC and spread pricing.
- Key insurance concepts for pharmacy include copay, coinsurance, deductible, out-of-pocket maximum, prior authorization, step therapy, and quantity limits.
- The 340B Drug Pricing Program allows safety-net providers to purchase outpatient drugs at discounted prices, with savings reinvested in patient care.
Organization of US Health Care Delivery
The US health care system is a mixed public-private model with multiple delivery settings:
- Hospitals — acute care, emergency services, surgical services, inpatient pharmacy.
- Ambulatory care — outpatient clinics, physician offices, urgent care centers.
- Long-term care (LTC) — nursing facilities, assisted living, with consultant pharmacist oversight under OBRA '90.
- Community pharmacies — retail chains, independents, grocery pharmacies.
- Mail-order pharmacies — typically 90-day fills for maintenance medications.
- Specialty pharmacies — high-cost, complex therapies (biologics, oncologics, orphan drugs) with patient support programs.
- Home infusion — parenteral nutrition, IV antibiotics, specialty injectables in the home.
- Managed care — integrated systems (Kaiser, VA) combining insurance and delivery.
Financing: Medicare, Medicaid, and Beyond
Medicare
Medicare is the federal program for people 65 and older, certain younger people with disabilities, and patients with end-stage renal disease (ESRD) or ALS. It has four parts:
| Part | Name | Coverage | Financing |
|---|---|---|---|
| A | Hospital Insurance | Inpatient hospital, skilled nursing facility, hospice, home health | Payroll taxes; premium-free for most beneficiaries |
| B | Medical Insurance | Physician services, outpatient care, durable medical equipment, some drugs | General revenues plus a monthly premium |
| C | Medicare Advantage (MA) | Private plans bundling A and B, often D and extras | Per-beneficiary capitation paid to plans |
| D | Prescription Drug Coverage | Outpatient prescription drugs | Private plans; beneficiary premiums |
Medicare Part D
Part D is delivered through stand-alone PDPs (paired with Original Medicare) or MA-PDs (Medicare Advantage with drug coverage). Each plan maintains a formulary organized into tiers:
- Tier 1: Preferred generics (lowest copay).
- Tier 2: Non-preferred generics.
- Tier 3: Preferred brand.
- Tier 4: Non-preferred brand or specialty.
- Tier 5: Specialty (highest coinsurance).
Coverage phases include deductible, initial coverage, the coverage gap (closing — by 2025 the "donut hole" is largely eliminated via manufacturer discounts and plan payments), and catastrophic coverage where beneficiaries pay minimal cost-sharing. TRICARE serves military beneficiaries and provides creditable coverage — drug coverage at least as good as standard Part D, which matters because late enrollment penalties apply without it.
Medicaid and CHIP
Medicaid is a state-federal partnership covering low-income children, pregnant women, elderly, and people with disabilities. The federal government sets minimum standards and matches state spending via the Federal Medical Assistance Percentage (FMAP). Most Medicaid beneficiaries receive drug coverage through Managed Care Organizations (MCOs). The Medicaid Drug Rebate Program (MDRP) requires manufacturers to rebate a percentage of Medicaid drug spending — the base rebate is 23.1% of the average manufacturer price (AMP) for brands and an average of 13% for generics, with additional rebates if AMP grows faster than CPI-U. CHIP (Children's Health Insurance Program) covers children in families earning too much for Medicaid but unable to afford private insurance.
Other Payers
Employer-sponsored insurance covers about half of Americans; large employers often self-insure under ERISA, which preempts many state mandates. ACA exchanges (Marketplaces) offer individual coverage with income-based subsidies. VA/DoD serve veterans and active military through their own formularies, anchored by the VA National Formulary.
Pharmacy Benefit Managers (PBMs)
PBMs (CVS Caremark, Express Scripts, OptumRx) administer drug benefits for payers. Their functions include:
- Formulary management — deciding which drugs are covered and at what tier.
- Rebate negotiation — extracting manufacturer rebates in exchange for preferred formulary placement.
- Pharmacy network management — preferred, narrow, and exclusive networks.
- MAC pricing (Maximum Allowable Cost) — generic reimbursement caps based on widely available market prices.
- Spread pricing — the difference between what a PBM pays a pharmacy and what it charges the payer; controversial and increasingly regulated at the state level.
- Utilization management — prior authorization, step therapy, and quantity limits.
Insurance Concepts and Cost Sharing
- Copay — fixed dollar amount per prescription (for example, $10 generic, $45 brand).
- Coinsurance — percentage of drug cost (typically 20-30% for specialty tiers).
- Deductible — amount paid out of pocket before coverage begins.
- Out-of-pocket maximum — annual cap on cost-sharing for essential health benefits.
- Prior authorization — payer approval required before dispensing a non-formulary or restricted drug.
- Step therapy — try a preferred agent first before a more expensive option is covered.
- Quantity limits — caps on doses per fill or per day for safety and cost control.
ACA, Value-Based Care, and 340B
Affordable Care Act (ACA)
Key pharmacy-relevant provisions of the Affordable Care Act (2010) include: dependent coverage to age 26, prohibition on pre-existing condition exclusions, essential health benefits (including prescription drugs), closing the Part D donut hole, and the Medical Loss Ratio (MLR) requiring plans to spend at least 80-85% of premiums on medical care rather than administration or profit.
Value-Based Care
- Accountable Care Organizations (ACOs) — provider groups accountable for cost and quality of a defined population.
- Bundled payments — a single payment for an episode of care, encouraging efficiency.
- Medication Therapy Management (MTM) — pharmacist-led comprehensive medication review (CMR), personal medication record (PMR), and medication action plan (MAP).
340B Drug Pricing Program
The 340B Drug Pricing Program requires drug manufacturers to provide outpatient drugs at significant discounts to covered entities (disproportionate share hospitals, federally qualified health centers, Ryan White clinics, hemophilia treatment centers, critical access hospitals, and others). Savings must be used to extend services to more patients or improve care for vulnerable populations. 340B has grown to represent a meaningful share of drug spending, with ongoing regulatory debates around contract pharmacies and the definition of an eligible patient. Factors influencing health care delivery — social (aging population, disparities), political (reform efforts), economic (drug pricing, insurance consolidation), and technological (telehealth, e-prescribing, EHRs, AI) — continue to reshape pharmacy practice and reimbursement.
Which Medicare part provides outpatient prescription drug coverage through private stand-alone PDPs or Medicare Advantage plans with drug coverage (MA-PDs)?
What does the Medicaid Drug Rebate Program (MDRP) require drug manufacturers to do?