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,
drug 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.
“The
West Health Policy Center commissioned this analysis to offer a clear path
forward for policymakers to reduce Medicare cost sharing without further lining
Big Pharma’s pockets,” said Timothy A. Lash, president of the West Health
Policy Center. “We are committed to common-sense solutions to lower healthcare
and prescription drug costs, which make lifesaving medicines out of reach for
millions of Americans, including many seniors.”
In
Medicare Part D, drug manufacturer rebates are paid by manufacturers after the
point of sale, generally to a pharmacy benefit manager (PBM), 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
this 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.
Milliman
estimated that the Senate Finance Committee’s Prescription Drug Pricing
Reduction Act of 2019 (PDPRA), 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 PDPRA.
Milliman’s analysis was completed before Senator Grassley announced revisions
to PDPRA; however, the revisions were intended to maintain the same
manufacturer contribution as the original PDPRA 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
considers spending changes if manufacturer rebates were fully directed to the
point of sale (POS), which would reduce total pharmacy reimbursement (“POS
rebates”). The second directs the rebate only to beneficiaries at the pharmacy
counter, using rebate dollars to lower their cost sharing (“beneficiary
rebates”). 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 surprising 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.
“Drug
manufacturers are the biggest winners under the POS rebate model, which they
neglect to mention when lobbying for the policy,” said Lash. “We wanted to see
if there was a way to ensure beneficiaries could ‘win’ through better
cost-sharing under a different rebate model.”
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.
Milliman’s
findings are consistent with previous analyses by the Centers for Medicare
& Medicaid Services Office of the Actuary and the Congressional Budget
Office that found POS rebates would significantly increase Medicare spending
while lowering costs for manufacturers. However, these analyses had not
considered the effect of a beneficiary rebate model.
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