A new assessment of the Medicare Part D program based on a proposal from the West Health Policy Center finds that Medicare beneficiaries would save $ 29 billion if drug manufacturer rebates were used to reduce their out-of-pocket costs at the pharmacy counter through the Part D benefit — as long as these rebate savings are not also used to reduce Part D manufacturer liability.
In contrast, pharmaceutical companies would profit and taxpayers would face additional costs if manufacturer rebates were directly applied to insurers’ pharmacy prices.
The independent actuarial firm Milliman conducted the assessment at the request of the non-profit, non-partisan West Health Policy Center.
In Medicare Part D, drug manufacturer rebates are paid by manufacturers after the point of sale, generally to a pharmacy benefit manager, who shares a portion of the rebates with the health insurer. Under this structure, rebates reduce premiums rather than out-of-pocket costs to beneficiaries.
For the analysis, Milliman modeled changes in recently proposed Senate legislation impacting Part D benefits, considering spending for the Medicare program, drug manufacturers and beneficiaries. At the West Health Policy Center’s request, Milliman also modeled two alternate add-on scenarios not in the Senate proposal that change how drug manufacturer rebates are handled under Part D.
WHAT’S THE IMPACT
Milliman estimated that the Senate Finance Committee’s Prescription Drug Pricing Reduction Act of 2019, as originally drafted, would generate savings of $ 63 billion for the Medicare program and $ 4 billion for beneficiaries from 2022 to 2029. These savings would be financed by increased contributions from drug manufacturers, who would offer $ 67 billion in additional discounts under the PDPRA legislation.
The analysis was completed before Iowa Senator Chuck Grassley announced revisions to PDPRA — but the revisions were intended to maintain the same manufacturer contribution as the original Act and are not expected to impact the directionality of Milliman’s results.
The additional scenarios reflect Senate leadership and White House interest in using manufacturer rebates to reduce costs at the pharmacy counter. The first scenario, dubbed ‘POS rebates,” considers spending changes if manufacturer rebates were fully directed to the point of sale, which would reduce total pharmacy reimbursement. The second, “beneficiary rebates,” directs the rebate only to beneficiaries at the pharmacy counter, using rebate dollars to lower their cost sharing. This beneficiary rebate scenario is the basis for the $ 29 billion in savings to Medicare beneficiaries.
Under the POS rebate model, drug manufacturers would see $ 44 billion in higher revenues compared to revenues under PDPRA. This result follows from the structure of the Medicare program. Manufacturers’ contributions to Medicare only begin once pharmacy spending has reached a certain threshold, so applying rebates directly to pharmacy spending means fewer beneficiaries reach the threshold, which reduces manufacturers’ contributions. While beneficiaries would see $ 19 billion in lower spending under this proposal, Medicare would make up the shortfall, spending an additional $ 63 billion in taxpayer dollars.
The beneficiary rebate model maintains manufacturers’ contributions to the program while sharing some of Medicare’s savings with beneficiaries. Under this model, beneficiary cost-sharing would be based on the net price of a drug after rebates, and the Part D plan would make up the balance of any pharmacy reimbursement.
The manufacturer contribution threshold, however, would be calculated based on the full, unrebated price of a drug, ensuring that manufacturers contribute appropriately for high-priced drugs. In this scenario, manufacturers would maintain the same $ 67 billion in contributions as under PDPRA, but beneficiaries would see $ 25 billion in lower spending.
Although Medicare costs would increase compared to PDPRA, the program would still save $ 38 billion compared to the present rebate system, effectively spreading total cost reductions more evenly between Medicare and beneficiaries. Combined with the $ 4 billion in savings achieved under PDPRA, this would result in $ 29 billion in total savings to Medicare beneficiaries.
THE LARGER TREND
In September, an Office of the Inspector General report showed that rebates negotiated by health insurers and pharmacy benefit managers slowed Medicare Part D spending on brand name drugs by 15%.
In the report, which was done by Congressional request, the OIG examined 1,510 brand-name drugs with Part D reimbursement and rebates each year from 2011 to 2015. It found that total reimbursement grew much more than rebate-adjusted reimbursement. Specifically, total Part D reimbursement for brand-name drugs increased by 19% from 2011 to 2015, versus a 4% increase in rebate-adjusted reimbursement for these drugs over the five years reviewed.
Although total rebate-adjusted reimbursement grew less than total reimbursement for brand-name drugs in Part D, Medicare still spent $ 2 billion more for brand-name drugs with rebates in 2015 than in 2011, the OIG said. Total Part D rebate-adjusted reimbursement increased from $ 46 billion to $ 48 billion.
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