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Extending PBM Rebates to Medicare Beneficiaries Without Increasing Medicare Spending

July 22, 2021
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There are two competing approaches to ensuring the Medicare Part D enrollees benefit from rebates paid by drug manufacturers to Pharmacy Benefit Managers (PBMs). The first, proposed by the Trump Administration, would base total pharmacy reimbursement on the cost net of rebates, increasing Medicare spending and drug manufacturer revenues. The second, proposed by the West Health Policy Center, would only base beneficiary out-of-pocket on costs net of rebates, lowering Medicare spending and maintaining drug manufacturer contributions to the Medicare Part D program. Beneficiaries would also see greater savings under the second model.

From 2022-2029, point-of-sale rebates as proposed by the Trump Administration could:

  • Increase Medicare spending by $63 billion compared to revenues and spending under the Prescription Drug Pricing Reduction Act of 2019 (PDPRA).
  • Increase pharmaceutical manufacturers’ revenues by $44 billion compared to PDPRA.

Over the same period, point-of-sale rebates as proposed by the West Health Policy Center could:

  • Save the Medicare program $38 billion compared to the current rebate system.
  • Save beneficiaries $29 billion compared to the current rebate system.
  • Maintain the estimated $67 billion in greater pharmaceutical manufacturer contributions under PDPRA.
Extending PBM Rebates to Medicare Beneficiaries Without Increasing Medicare Spending

Introduction

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 (Figure 1), rebates reduce premiums rather than out-of-pocket costs to beneficiaries.

For this analysis, West Health commissioned a study by the actuarial firm Milliman to model three scenarios that impact Part D benefits, considering spending for the Medicare program, drug manufacturers, and beneficiaries under the Prescription Drug Pricing Reduction Act of 2019 (PDPRA), as originally drafted, and two alternative scenarios. The two alternative rebate systems are if manufacturer rebates were to be fully directed to point-of-sale (“POS rebates”) and if rebates were applied only to the beneficiaries’ cost sharing at the pharmacy counter(“beneficiary rebates”). The first approach mirrors the Trump Administration’s policy, while the second is a new proposal by the West Health Policy Center.

In 2020, the Trump Administration finalized a change to the Anti-Kickback Statute that would require PBM rebates be extended to Medicare beneficiaries at the point of sale. This change has been estimated to cost the Medicare program an additional $196 billion; this analysis considers the additional costs this requirement would impose under PDPRA, as the Congressional Budget Office score for PDPRA was completed before this requirement was finalized. Alternatively, this analysis considers the savings that would be generated if the West Health Policy Center approach to point-of-sale rebates were used in place of the Trump Administration approach.

Results

Over the study period, from 2022-2029, the Senate Finance Committee’s PDPRA (Figure 2), 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 pay $67 billion in additional discounts under PDPRA.

If a POS rebate model were applied to the benefit design under PDPRA, as would happen under the rule finalized by the Trump Administration, drug manufacturers would see $44 billion in higher revenues compared to their revenues without a POS rebate model. Manufacturers’ contributions to Medicare only begin once pharmacy spending has reached a specific threshold, so applying rebates directly to pharmacy spending means fewer beneficiaries reach the threshold, which reduces manufacturers’ contributions. Medicare would make up this difference, spending an additional $63 billion in taxpayer dollars.

The beneficiary rebate model, as proposed by the West Health Policy Center, maintains manufacturers’ contributions to the program while sharing some of Medicare’s savings from PDPRA with beneficiaries. Under this model (Figure 3), 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 model, manufacturers would maintain the same $67 billion in contributions as under PDPRA, but beneficiaries would see an additional $25billion in lower spending. Although Medicare costs would increase compared to PDPRA, the program would save $38 billion compared to the present rebate system, effectively spreading total cost reductions more evenly between Medicare and beneficiaries. This would result in $29 billion in total savings to Medicare beneficiaries compared to current program design.

These 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.

Under the Trump Administration’s rebate rule,  the PDPRA Part D redesign would: 

  • Increase Medicare spending by $63 billion
  • Save beneficiaries $19 billion
  • Increased drug manufacturer revenues by $44 billion

Under the West Health rebate approach,  the PDPRA Part D redesign would:    

  • Save Medicare $38 billion
  • Save beneficiaries $29 billion
  • Increase drug manufacturer contributions to Medicare by $67 billion

                                 

Considerations for Policymakers

This analysis estimates that the beneficiary rebate scenario would be most impactful in balancing savings for both beneficiaries and the Medicare program. Under this alternative benefit design, manufacturers would be responsible for the same $67 billion that they would spend under PDPRA, but beneficiaries would save a total of $29 billion. While the Medicare program would spend more in this scenario than it would under PDPRA as written, the program would still save $38 billion compared to the current rebate system, which would spread total cost reduction more evenly between Medicare and beneficiaries.

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