Medicaid Rebates for Brand-Name Drugs Exceeded Part D Rebates by a Substantial Margin

Department of Health and Human Services, Office of Inspector General, April 2015

Conclusion

Drug rebates reduce the program costs of both Medicare Part D and Medicaid. Medicaid rebates are defined by statute and include additional rebates when prices for brand-name drugs increase faster than inflation. In contrast, Part D sponsors (or contractors acting on their behalf) negotiate rebates with drug manufacturers, and there are no statutory requirements regarding the amounts of these rebates. In fact, the law establishing the Part D program expressly prohibits the Government from instituting a price structure for the reimbursement of covered Part D drugs.

We found that Part D sponsors and State Medicaid agencies paid pharmacies similar amounts for most brand-name drugs under review. However, Medicaid rebates for brand-name drugs exceeded Part D rebates by a substantial margin. Additionally, Medicaid’s net unit costs (i.e., pharmacy reimbursement minus rebates) were much lower than net unit costs under Part D in 2012 for nearly all selected drugs. Also, more than half of Medicaid rebates owed by manufacturers for selected brand-name drugs were attributed to the inflation-based add-on rebates.

A major driver of the higher Medicaid rebates was the additional amount owed when prices for brand-name drugs increase faster than inflation. This rebate not only produces additional Medicaid rebates, but also helps protect the program from increased costs when manufacturers raise prices. The Part D program does not contain a similar provision.

This is the second OIG evaluation that demonstrates the substantial difference in rebates collected under Medicaid and Medicare Part D. While we recognize the statutory limitations surrounding rebate collection under Part D, we encourage CMS and Congress to explore the costs and benefits of obtaining additional rebates under Part D.

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Appendix

Agency Comments

To:  Daniel Levinson, Inspector General

From:  Marilyn Tavenner, Administrator, CMS

Subject:  Office of Inspector General (OIG) Draft Report: “Update: Higher Drug Rebates Result in Lower Costs for Medicaid Compared to Medicare Part D” (OEI-03-13-00650)

The Centers for Medicare and Medicaid Services appreciates the opportunity to review and comment on the OIG’s draft report. The Part D program has significantly outperformed cost estimates, resulting in lower than expected premium levels since the inception of the program. Additionally, starting in 2011, brand drug manufacturers provide a 50 percent discount for their products to beneficiaries in the Part D coverage gap phase o f the benefit.

As this report discussed, minimum drug manufacturer rebates under the Medicaid program are defined by statute whereas similar rebates under the Medicare Part D program are determined solely through negotiations between drug manufacturers and Part D sponsors. However, Section !8600-ll(i)(1) of the Social Security Act states that CMS “may not interfere with the negotiations between drug manufacturers and pharmacies and PDP sponsors.” Consequently, absent new legislative authority, CMS cannot interfere in the rebate negotiations between Part D sponsors and drug manufacturers to secure additional rebates.

The Part D program has significantly outperformed cost estimates, resulting in lower than expected premium levels since the inception of the program. Additionally, starting in 20 II, brand drug manufacturers provide a 50 percent discount for their products to beneficiaries in the Part D coverage gap phase of the benefit.

Thank you for the opportunity to review and comment on this draft OIG report.

https://oig.hhs.gov/oei/reports/oei-03-13-00650.pdf

Patient advocates were rightfully upset when Congress included a prohibition in the Medicare Part D drug program preventing the government from instituting a price structure for the reimbursement of covered drugs. The OIG has now released another report showing that the net cost of drugs under the Part D program, which relies on private sector negotiations, are much higher than the net cost of drugs under the government-administered Medicaid program.

CMS administrator Marilyn Tavenner has provided a response which is included in the appendix to this report. Whereas her comment appropriately concurs with the OIG observation that CMS cannot interfere in the rebate negotiations between Part D sponsors and drug manufacturers, her unsolicited comment praising the performance of the Part D program warrants concern. (The fact that the “cut and paste” error of including the comment twice shows the importance they place in including this diversionary concept in their response.)

Whenever CMS is challenged on the higher drug costs through the Part D program, their routine response is to report that “The Part D program has significantly outperformed cost estimates, resulting in lower than expected premium levels since the inception of the program.” They never suggest that CMS should be granted the authority to negotiate lower Part D costs, as they already do with Medicaid. Thus, passively, they continue to be supportive of the pharmaceutical industry and the private Part D insurers and pharmacy benefit managers.

This is part of the pattern of CMS supporting the private sector, which includes their devious innovations to increase payments to private Medicare Advantage plans when the unequivocal intent of the law was to reduce their overpayments.

It is clear that CMS, with the full support of President Obama, is providing extra financial support, directly or indirectly, to the private sector administrators of our health care dollars, when the evidence is overwhelming that the public sector would obtain for us much greater value in our health care purchasing. The Obama administration appears to be permeated with industry shills.

It is no wonder that they reject any consideration of single payer. That would ruin the corrupt relationship that they have with the private sector.