Passing Rebates to Medicare Part D Beneficiaries Could Save Them $29 Billion, Report Says

December 20, 2019

A new analysis says allowing beneficiaries in Medicare Part D to benefit from drug manufacturer rebates shows that they could save $29 billion. But if another proposal is chosen, they would save less, and taxpayer costs would rise.

Which stakeholders would benefit and which would lose as policy makers continue to examine ways of changing Medicare drug benefits?

A new analysis says allowing beneficiaries in Medicare Part D to benefit from drug manufacturer rebates shows that they could save $29 billion. But if another proposal is chosen, they would save less, and taxpayer costs would rise.

The analysis, conducted by Milliman for the West Health Policy Center, examined the original language of the Senate Finance Committee’s Prescription Drug Pricing Reduction Act of 2019 (PDPRA) and said it would generate savings of $63 billion for the Medicare program and $4 billion for beneficiaries from 2022 to 2029.

The committee passed the original legislation in July 2019. It would create an out-of-pocket maximum for Part D beneficiaries; the savings would be financed by increased contributions from drug manufacturers, which would offer $67 billion in additional discounts.

The language of the bill was updated earlier this month, but Milliman’s analysis was completed before the revisions. According to the office of Senator Chuck Grassley, R-Iowa, the revision made further changes to the Part D redesign and other sections, but the white paper said the changes were intended to maintain the same manufacturer contribution as the original PDPRA and are not expected to impact the directionality of Milliman’s results.

In Medicare Part D, drug manufacturer rebates are paid by manufacturers after the point of sale, generally to a pharmacy benefit manager, which shares a portion of the rebates with the health insurer. Under this structure, rebates reduce premiums rather than out-of-pocket costs to beneficiaries.

However, pharmaceutical companies would profit and taxpayer burden would rise if manufacturer rebates were directly applied to insurers’ pharmacy prices, the report said.

Milliman also modeled 2 alternate add-on scenarios not in the Senate proposal that change how drug manufacturer rebates are handled under Part D.

“The additional scenarios reflect Senate leadership and White House interest in using manufacturer rebates to reduce costs at the pharmacy counter,” the report said.

The first considers spending changes if rebates were fully directed to the point of sale (POS), reducing total pharmacy reimbursement (“POS rebates”). Under the POS rebate model, drug manufacturers would see $44 billion in higher revenues compared with revenues under PDPRA. This result is due to 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 second 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 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. 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 with PDPRA, the program would still save $38 billion compared with 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.

Previous analyses by CMS’ Office of the Actuary and the Congressional Budget Office that found POS rebates would significantly increase Medicare spending while lowering costs for manufacturers, but these analyses had not considered the effect of a beneficiary rebate model.