ISPOR - US Healthcare System Overview

Regulatory Pathway and Market Approval Process

Prior to marketing of branded and generic pharmaceutical products in the United States, approval is required by the US Food and Drug Administration (FDA).

Small Molecule Drug Applications

The traditional small molecule approval pathway through the FDA was instituted with the passing of the Food Drug and Cosmetic Act of 1938.26 First, a New Drug Application (NDA) 505(b)(1) is submitted to the FDA by the manufacturer. The goals of the NDA are to provide enough information to permit FDA reviewers to answer questions about the product’s safety and effectiveness in its proposed use. It also allows FDA reviewers to determine if the benefits outweigh the risks, if the drug’s proposed labeling is appropriate, and if the quality controls and methods used in manufacturing the drug are adequate. This NDA package is delivered to the Center for Drug Evaluation and Research (CDER) at the FDA for review.30,31 For generic drugs, an Abbreviated New Drug Application (ANDA) 505(b)(2) is required. This document proves equivalence to an innovator drug in dosage form, strength, route of administration, quality, performance characteristics, and intended use. These documents are “abbreviated” because they do not require preclinical and clinical data to establish safety and effectiveness.32

Biologic Drug Applications

Similar to approval of small-molecule drugs, a Biologics License Application (BLA) 351(a) is the required document for submission of a biologic drug for approval. Therapeutic biologic products include monoclonal antibodies for in vivo use, cytokines, growth factors, enzymes, immunomodulators, thrombolytics, and proteins extracted from animals, vaccines, and microorganisms. The BLA contains specific information on manufacturing processes, chemistry, clinical pharmacology, and safety and efficacy of the product.33 Biosimilars, the generic equivalent of biologic drugs, must file a Biosimilar Biologics License Application 351(k). The goal of this application is to show that the biosimilar is “highly similar” to the biologic reference product. Interchangeability of biosimilars and their reference biologic product may require further evidence and documentation to the FDA. Both the CDER and Center for Biologics Evaluation and Research (CBER) are responsible for reviewing BLAs, depending on the therapeutic area of the product.

Approval Decision by the FDA

After the initial NDA or BLA submission, the manufacturer waits for a response from the FDA. The Prescription Drug User Fee Act (PDUFA) plays a major role in expediting the drug approval process by the FDA in the United States. PDUFA was first authorized in 1992 through September 2022. This program was initiated due to a backlog of new drug applications in the 1990s in order to help improve the FDA’s resources and ability to approve drugs within a reasonable time after submission. With the PDUFA program, all drug manufacturers pay application and program fees while submitting an NDA in order to guarantee timely review by the FDA for an NDA or BLA submission.³⁴

The Prescription Drug User Fee Act (PDUFA) helps speed up FDA drug approvals. It was created in the 1990s to address a backlog of applications and improve review times.

Under PDUFA, the FDA is given 10 months to review an NDA or BLA. However, if priority review is designated by the FDA, the review process is reduced to 6 months. Not every drug can be given priority review and this often includes breakthrough therapies where no or few other treatment options exist. Upon the receipt of an NDA or BLA, the FDA has 60 days to respond with a decision to file or reject the document; if it is accepted, the PDUFA date countdown begins.³⁵

The FDA can exercise 3 options when reviewing an NDA or BLA:

Approval Letter — Drug is determined to be safe and effective as submitted in the original NDA or BLA. Approval becomes effective on the date of the letter and allows for marketing to begin.
Complete Response Letter — The drug has not been approved and information is presented to the sponsor outlining the materials required or conditions that need to be met for approval.
Delay PDUFA Date — The FDA may, ahead of the scheduled PDUFA date, push back the date for further internal review of the product.

Figure 10

Regulatory Pathway for Pharmaceutical Products in the United States

Special FDA Drug Approval Pathways and Review Channels

Priority Review

Reduces FDA’s goal to take action on an application from 10 months to 6 months. This designation is decided by the FDA; however, an applicant may request Priority Review. Significant improvement from standard of care must be shown in the safety or efficacy of the product.³⁶

Accelerated Approval

Designation based on the effect of a drug for serious conditions that fills an unmet need via effect on a surrogate or intermediate clinical endpoint. These surrogate endpoints must be validated and must be “reasonably likely” to predict the clinical benefit of the drug. The use of these surrogate endpoints enables the FDA to approve drugs more quickly.³⁶

Fast Track

Designed to facilitate the development and expedite the review of drugs to treat serious conditions and fill an unmet need. Fast-track drugs must be developed to treat a condition with no current therapy or show superior effectiveness or safety when compared to available therapies. This designation must be requested by the drug company. The Fast Track designation allows for more frequent meetings and communications with the FDA, eligibility for accelerated approval and priority review, and rolling review (the NDA or BLA may be submitted in sections).³⁶

Breakthrough Therapy

A designation given to products that demonstrate substantial improvement over available therapies on clinically significant endpoints. This designation must be requested by the drug company, but often, the FDA may suggest that a manufacturer submit a request. If a Breakthrough Therapy designation is received, the manufacturer receives all the benefits of Fast Track, along with intensive guidance on an efficient drug development program and an organization commitment at the senior manager level from the FDA.

Regenerative Medicine Advanced Therapy Designation (RMAT)

A designation given to products that are considered regenerative medicine therapies that are intended to treat, modify, reverse, or cure a serious condition and have the potential to address unmet medical needs for such diseases or conditions. This designation follows the same application process as a Breakthrough Therapy designation and is entitled to the same benefits. In addition, RMAT designations also include support for potential ways to support accelerated approval and satisfy postapproval requirements.³⁷

Qualified Infectious Disease Product (QDIP)

In order to incentivize antibiotic drug development, the FDA started the QDIP program in 2012. Through this designation, the FDA may offer Fast Track designation, priority review, and a possible 5-year extension of any patent exclusivity that the application qualifies for upon approval.³⁸

Rare Pediatric Disease Voucher Program

In 2016, the FDA defined “rare pediatric disease” to include any serious or life-threatening disease that primarily affects individuals less than 18 years of age. If a drug sponsor submits a successful application and requests designation as a “rare pediatric disease,” they will receive a voucher that can be redeemed to receive priority review of a subsequent marketing application for a different product.39 On December 27, 2020, the Rare Pediatric Disease Priority Review Voucher Program saw an extension. Under this extension, the FDA can issue a voucher for an approved application of a rare pediatric disease product only if the sponsor has obtained rare pediatric disease designation for the drug by September 30, 2024. After September 30, 2026, the FDA will no longer grant any rare pediatric disease priority review vouchers, in line with existing statutory sunset provisions.

Orphan Drug

A manufacturer may apply for orphan drug designation when their product is for a population of less than 200,000 individuals in the United States, or greater than 200,000 but it is unreasonable to expect drug development costs to be offset by sales. With this designation, the manufacturer receives development incentives including tax credits for qualified clinical testing and a PDUFA fee waiver.40 In addition, orphan drug designation qualifies sponsors for possible exclusivity for 7 years once approved.

Reimbursement and Pricing Approval Process

After an Approval Letter is received from the FDA, the product can be marketed in the United States. Once on the market, the product is reviewed by different healthcare bodies that will determine the market access for individuals based on coverage and reimbursement decisions before reaching the patient.

Drug Pricing Rules and Regulations

The most common pricing metric used in the United States is wholesale acquisition cost (WAC). The WAC, though, is not the price paid by the end user, or even the insurance company. Large rebates are usually added into contracts with payers in exchange for preferred formulary placement, leading to an inflated list price. Generally speaking, payers in the United States (both [Centers for Medicare and Medicaid Services] CMS and private insurance companies) do not explicitly regulate the price of a pharmaceutical product. However, there are pricing policies that manufacturers must use when contracting with CMS that determine a drug’s price based on private contracts negotiated in the free market:

Public Health Service 340B Price

A hospital that provides healthcare to a large number of uninsured patients may qualify as a 340B Public Health Service Hospital. With this qualification, the highest price paid for a drug is equal to the price that the state Medicaid agency would pay, absent any supplemental discount or rebate. However, this price is usually lower than Medicaid pricing because 340B providers can usually negotiate sub-ceiling prices. Brand-name drugs reported pricing at 51% of average wholesale price (AWP) on average.⁴¹ Three requirements are necessary to receive 340B pricing: government ownership (or nonprofit with government contracts), a Medicare disproportionate share hospital-adjustment percentage of at least 11.75% for the most recent quarter, and a signed statement saying they will not use a group purchasing organization for drug acquisition.⁴¹

Inflation Reduction Act (IRA)

The Inflation Reduction Act (IRA) is a proposed legislation aimed at reducing drug prices in the United States. The IRA would require the Department of Health and Human Services (HHS) to negotiate drug prices with manufacturers on behalf of Medicare and Medicaid, using an international pricing index as a benchmark. The legislation would also limit the price increases of prescription drugs to the rate of inflation and require manufacturers to provide rebates to Medicare if their prices exceed the inflation cap. The IRA is intended to address the issue of inflated list prices, which are often negotiated with payers through large rebates in exchange for preferred formulary placement. While payers in the United States do not explicitly regulate the price of pharmaceutical products, there are pricing policies, such as the Public Health Service 340B Price, which determine a drug’s price based on private contracts negotiated in the free market. The IRA proposes to introduce a new pricing model that could have a significant impact on drug pricing rules and regulations in the United States.42 Table 1 lists the first 10 drugs to undergo CMS's Drug Price Negotiation Program.

TABLE 1

First 10 Drugs Negotiated as a Result of IRA

Drug Name	Participating Manufacturer
Eliquis (apixaban)	Bristol Myers Squibb
Jardiance (empagliflozin)	Boehringer Ingelheim
Xarelto (rivaroxaban)	Janssen Pharmaceuticals
Januvia (sitagliptin)	Merck Sharp Dohme
Farxiga (dapagliflozin)	AstraZeneca AB
Entresto (sacubitril/valsartan)	Novartis Pharms Corp
Enbrel (etanercept)	Immunex Corporation
Imbruvica (ibrutinib)	Pharmacyclics LLC
Stelara (ustekinumab)	Janssen Biotech, Inc.
Fiasp (insulin aspart); Fiasp FlexTouch; Fiasp PenFill; NovoLog; NovoLog FlexPen; NovoLog PenFill	Novo Nordisk Inc.

Medicare Part B

Drugs administered in the outpatient setting and reimbursed through Medicare Part B are reimbursed at average sales price (ASP) +6%.⁴⁴ Per IRA, changes in the Medicare Part B program will improve access to high-quality, affordable biosimilars, as well as $35 per month of cost-sharing cap on insulin used in medical equipment pumps.⁴³

Medicare Part D

Since Medicare Part D drug plans are managed through PBMs and commercial health plans, each Part D Plan (PDP) sets its own terms of payment.⁴⁵ Additionally, the IRA will lower the cost of medications and redesign drug programs. These benefits will include:

Access to recommended adult vaccines for preventative care without cost-sharing
A yearly cap of $2000 in 2025 on out-of-pocket prescription drug costs
Expansion of the Low-Income Subsidy (LIS) program under Part D to 150% of the federal poverty level starting in 2024
Insulin will be available at $35 per month per covered prescription⁴³

Medicare Drug Price Negotiation

Under IRA, Medicare will negotiate with drug manufacturers directly to lower the price of some of the most expensive singlesource brand-name drugs. This will increase access to life-changing and innovative medications to the Medicare population.⁴³

Inflation Rebates in Medicare Under Inflation Reduction Act (IRA)

Under IRA, the drug companies will be required to pay Medicare rebates when they raise their drug prices due to inflation.⁴³

Medicaid

The Medicaid best price agreement is the strategy used to guarantee Medicaid programs the lowest available drug prices. It requires a minimum of 23.1% off of the average manufacturer price (AMP) or the “best price” that is given to any other private or public purchaser (besides the VHA, Department of Defense, and private Medicare PDPs). Additionally, it requires an adjustment if the drug price increases faster than inflation.⁴⁴

Veterans Health Administration

The VHA utilizes its power as the sole purchaser of drugs to limit prices and formulary. For a drug to be covered on the formulary, the manufacturers must list their drugs on the Federal Supply Schedule (FSS). Like Medicaid, the price must be a minimum of 24% off of AMP or the “best price” given to another private purchaser. Discounts are also given if the price increases faster than inflation. The VHA’s discounts are mandated by law and manufacturers must comply in order to have access to the Medicaid market.⁴⁵

Military Health Service

In a manner almost identical to other government funded entities, MHS also negotiates for a national formulary. Similarly, the 24% off of AMP or “best price” is applied. The MHS also accounts for additional discounts if prices from manufacturers increase faster than inflation. MHS and the VHA often negotiate together in order to increase their bargaining power.⁴⁵

Participants in the Distribution and Reimbursement of Brand-Name Prescription Drugs⁴⁶

The distribution and reimbursement of brand-name prescription drugs in the United States is a complex enterprise made of transactions among the multiple parties involved in drug manufacturing and distribution (manufacturers and wholesalers); provision of the drug product to patients (pharmacies and healthcare providers); reimbursement and payment under an insurance benefit (health plans or insurers and pharmacy benefit managers [PBMs]); and negotiation of purchasing and reimbursement rates among parties (group purchasing organizations and pharmacy services administrative organizations).

Manufacturers of brand-name pharmaceuticals research, develop, and bring new drug products to market. Once a drug is approved by the FDA, manufacturers serve as the source of the drug product while wholesalers serve as intermediaries, managing drug product inventory, warehousing, and the complex logistics of shipment of drug products to thousands of pharmacies and healthcare providers.

Pharmacies dispense drug products to patients, serving as the main outlet through which patients obtain self-administered prescription drugs (as opposed to medications administered by a healthcare provider).

Healthcare providers who practice independently in solo practices; drug purchasing and billing are performed at the clinic or institution level.

Patients act as consumers of drug products and are covered under an insurance policy; they are often referred to as beneficiaries or members.

Health plans or insurers or payers provide coverage for medical and pharmacy services to their members. Employers and members pay premiums for coverage, and public insurance programs (eg, Medicare) are partially funded with tax dollars. Health plans or insurers often subcontract the administration of pharmacy benefits to PBMs. PBMs design formularies, negotiate discounts with manufacturers, establish pharmacy networks, negotiate contracts with pharmacies, and process and pay claims.

The largest PBMs operate as platform businesses that are affiliated with or owned by insurers, pharmacies, and group purchasing organizations that are buying consortiums that aggregate purchasing power, allowing them to negotiate better discounts than they would access on their own.

Pharmacy services administrative organizations manage and negotiate contracts with PBMs on behalf of independent pharmacies. This involves the negotiation of contract terms, reimbursement levels, and participation in pharmacy networks. Some pharmacy services administrative organizations are affiliated with or owned by wholesalers.

Distribution and Reimbursement of Brand-Name Drugs Covered Through the Pharmacy Benefit of an Insurance Policy

Manufacturers produce the drug product and establish the list price.
Wholesalers purchase and then distribute the drug product to pharmacies. Contracts between pharmacies and wholesalers determine the rate that pharmacies pay for the drugs. Group purchasing organizations may play a role in the negotiation of purchasing rates. (In some cases, the price at which the wholesaler distributes the drug to the pharmacy is lower than the price that the wholesaler negotiates with the manufacturer. In these instances, wholesalers invoice the manufacturer to recover the difference in the form of a chargeback.)
Pharmacies dispense drugs to patients and collect out-of-pocket payments from them. Payments in the deductible phase of an insurance policy and coinsurance are based on the list price of a drug.
Manufacturers often offer copay assistance to help patients access their brand-name drugs when facing high outof-pocket costs. Assistance often takes the form of copay coupons or cards accepted by pharmacies and applied at the point of sale. More recently, some health plans do not allow the counting of manufacturer coupons toward the deductible or out-of-pocket maximum; these restrictions are called copayment accumulators.
Pharmacies submit claims to PBMs for reimbursement of the insurer share of the drug dispensed to patients. Reimbursement rates are established on the contracts negotiated between pharmacies and PBMs directly.
Health plans or insurers often subcontract the management of the pharmacy benefits to PBMs and remit payment to PBMs for their services.
PBMs design formularies and determine patient cost-sharing for drug products.
PBMs pass a share of rebates to health plans or insurers, depending on the contract stipulated between them.

Figure 11

Distribution and Reimbursement of Brand-Name Drugs Covered Through the Pharmacy Benefit of an Insurance Policy⁴⁶

Distribution and Reimbursement of Brand-Name Drugs Covered Through the Medical Benefit of an Insurance Policy

Wholesalers purchase the drug product from manufacturers based on list price, with or without a discount.
Wholesalers distribute the drug product to healthcare providers and group purchasing organizations.
Group purchasing organizations receive a percentage of sales that their members purchase through the contracts negotiated.
Wholesalers submit chargeback invoices to the manufacturer to recover differences between the amount paid to the manufacturer and the amount received from healthcare providers, when applicable.
Healthcare providers administer the drug to patients. Providers collect patient out-of-pocket payments for the drug product and the professional services associated with its administration.
Healthcare providers submit claims to the health plan or insurer. Reimbursement rates for the drug product are typically calculated as a percentage of the acquisition cost of the drug. This percentage often exceeds 100%, with the markup intended to cover costs associated with storage and handling of the drug product.
Health plans or insurers negotiate with manufacturers for rebates on provider-administered drugs in exchange for coverage without prior authorizations or step therapy requirements.

Figure 12

Distribution and Reimbursement of Brand-Name Drugs Covered Through the Medical Benefit of an Insurance Policy⁴⁶

Access and Reimbursement Processes for Pharmaceuticals

The first step in the journey to drug reimbursement begins at the manufacturer with the formation of an evidence dossier. These dossiers summarize the key clinical and economic evidence for a product, with other key considerations such as drug acquisition costs and potential budget impact. Pharmaceutical sponsors typically develop an Academy of Managed Care Pharmacy (AMCP) Dossier detailing key clinical and economic evidence for their product and submit it to AMCP. The dossier gets uploaded on the AMCP portal and is made available to healthcare decision makers (health plans, PBMs, government agencies, etc) upon their unsolicited requests. This information is used to support reimbursement and/or formulary placement, consideration of a new product, new indication, or new formulation of an existing product. More detail regarding the structure and elements of the AMCP dossier can be found in the “Documentation Requirements” section.⁴⁷ After this dossier has been submitted, it is used by these healthcare decision makers in a process called a pharmacy & therapeutics (P&T) committee. Through this process, the payer or health system decision makers determine if a product will be on the formulary for reimbursement and what hurdles to therapy may be put in place in order to control cost or access to the medication. If a drug is not approved on a formulary and a patient wants to take the drug, they will be responsible for 100% of the cost of the drug. (For more information, see Financing and Distribution of Pharmaceuticals in the United States under Suggested Readings). Below are a few examples of access restrictions that P&T committees may put in place:

The first step in the journey to drug reimbursement begins at the manufacturer with the formation of an evidence dossier.

Preferred/Nonpreferred Tier Placement

If a drug receives preferred tier placement on a formulary, it is usually available without restriction and is reimbursed at a higher level, leaving less of the drug to be paid for by patient copayment. A nonpreferred tier placement means that patients will be responsible for a larger copay or coinsurance if they want access to the product.

Step Therapy

This access restriction requires patients to have a documented history of having tried a certain product(s) before access to the restricted drug will be granted and reimbursed.

Prior Authorization (PA)

In order for health plans to cover a product, they will require written documentation of need from the prescribing physician. Often, these PAs will require not only physician sign-off, but laboratory values or diagnosis codes that support the use of the medication in that patient. Additionally, these authorizations last for a limited amount of time and must be reauthorized by the physician after certain time points.

More recently, value assessment of drugs, diagnostics, and devices have become more important when considering formulary inclusion. While the US market seeks to become more value based, the actual practice of value assessment is still nascent. Institute of Clinical and Economic Review (ICER) has become a price watchdog in the United States and conducts its own third-party independent reviews of various therapeutic areas, to determine cost-effectiveness of pharmaceutical drugs through the use of incremental cost-effectiveness thresholds of $50,000 to $150,000 per quality-adjusted life year (QALY).48 These assessments model the structure of European price watchdogs such as the National Institute for Health and Care Excellence (NICE [the United Kingdom]). These ICER evaluations are done at the health-system level for the United States as a whole and do not offer cost-effectiveness measures for specific subpopulations, thus the generalizability and transparency of ICER reviews has come under question, as MCOs, PBMs, and health systems prioritize different aspects of care when assessing cost-effectiveness. For this reason, it is common practice for insurance companies to conduct their own value assessments to guide their decision making.

While the US market seeks to become more value based, the actual practice of value assessment is still nascent.

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Published August 26, 2025

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