GAO: Medicare Part D plans collect nearly all drug rebates

Medicare Part D health plans raked in nearly all of the drug rebates from manufacturers in 2016, leaving premiums relatively flat for price-conscious seniors with prescription drug plans, according to a government watchdog study on Wednesday.

The Government Accountability Office found that in 2016 rebates and other price concessions from manufacturers accounted for roughly $29 billion, or 20% of all Part D spending, and insurers receive 99.6% of those rebates. Nearly all of those savings go to plan sponsors, shining a light on why insurers are so desperate to preserve them as Congress looks to reform the program.

Total Part D spending was just over $145 billion in 2016. This year, it is slated to account for 15% of all Medicare spending. Yet according to the CMS, Part D premiums are in a three-year decline. Average premiums are supposed to cost just $30 by 2020.

PBMs, who have proved to be a political punching bag in Congress this year, negotiated about $18 billion in rebates from manufacturers in 2016 but collected just 0.4% of the payments. The remainder went to Part D plans, where they can be used to keep premiums low.

The GAO illustrated why insurers fought so hard against the Trump administration’s recently axed proposal to require that all rebates get passed along to patients.

Plans had warned that the proposed regulation if finalized would drive a spike in Part D premiums, which would be a major issue in the fiercely competitive Part D market. The Congressional Budget Office and other analysts agreed that premiums would rise.

The GAO also reaffirmed HHS Office of Inspector General analysis from last year that found the most heavily used brand-name drugs are driving the cost growth in Part D. Popular drugs would be difficult to exclude from a formulary.

As spending on these drugs went up, so did the rebates and price concessions, the GAO found. The most-prescribed and expensive drugs, which accounted for 65% of Part D spending in 2016, also accounted for 90% of the rebates and concessions.

The structure of the so-called “catastrophic phase” is one of Part D’s flaws. It requires the government to shoulder most of the cost for expensive drugs once seniors’ out-of-pocket spending reaches a certain limit. Congress has considered cutting Medicare’s share of catastrophic coverage from 80% to 20% over four years, putting more of the burden on Part D insurers to reduce their cushion from price hikes.

Net spending for Part D, which subtracts out the rebates and other concessions, grew more slowly than the rebates: 13% between 2014 and 2016, versus 20%.

The major PBM trade group, Pharmaceutical Care Management Association, welcomed the GAO report as offering some vindication.

In a statement, PCMA’s CEO JC Scott highlighted the agency’s finding that “virtually all — 99.6% — prescription drug rebates negotiated by PBMs with drug manufacturers in Medicare Part D are passed through to drug plan sponsors and used to lower costs for Medicare beneficiaries.”

Scott also highlighted the CMS’ findings that Part D plans have declined slightly over the past three years, from $34.70 on average in 2017 to a projected $30 in 2020.

Specifically on the PBM revenue, the GAO found that most PBMs must pass through all their negotiated rebates to the Part D plans, per their contract agreements. PBMs make most of their money through a volume-based fee paid by plan sponsors based on the number of paid claims processed by the PBM, a flat monthly per-member fee, or a combination of the two.

The GAO study was commissioned by House Ways and Means Committee Chair Richard Neal (D-Mass.) to help inform the drug pricing policy debate in the House.

He and other House leaders have signaled their intent to overhaul Part D, but so far only the Senate Finance Committee has released and passed specific proposals. Those bipartisan proposals have drawn sharp opposition from pharma and many Senate Republicans, and it’s unclear whether Congress will be able to pass major reforms.

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