Rebates Blur Medicare Part D Price Picture: GAO

Chart shows rebates are growing as a percentage of total Medicare Part D spending. 2016: $145 billion total, $29 billion is rebates and other concessions; 2014: $121 billion total spending, $18 billion rebates and concessions.

Use of rebates and other discounts makes understanding what's really happening to U.S. prescription drug spending complicated.

The Medicare Part D prescription drug program's "gross spending" on drugs increased 20% between 2014 and 2016, to $145 billion, according to a report released earlier this week by the U.S. Government Accountability Office (GAO).

But net drug program spending on drugs increased just 13%, to $116 billion.

The big gap between the gross spending and the net spending was due to the manufacturers' rebates and other price concessions, GAO officials say.

The price concession total soared 66% between 2014 and 2016, to $29 billion.

Price concessions amounted to 20% of gross spending in 2016, up from 14% in 2014.

GAO analysts included a figure illustrating what happened to use of Medicare Part D program price concessions in a look at use of pharmacy benefit managers to efforts to manage drug expenditures in the Medicare Part D program.

Medicare Part D Basics

The original Medicare program provided no coverage for prescription drugs.

Congress included the provision that created the program in the Medicare Modernization Act of 2003. The Part D program began providing drug coverage in 2016.

The program gives private insurers a mechanism for providing subsidized coverage through a system that, in many ways, is similar to the Affordable Care Act public exchange system for major medical coverage. The big difference is that managers of the Medicare Part D program have depended on insurers, brokers and agents to sell the Medicare drug coverage, rather than focusing on selling coverage through centralized, government-run websites.

About 46 million people now have Medicare drug coverage through Medicare Advantage plans with drug benefits, or through stand-alone Medicare prescription drug insurance policies, according to the Centers for Medicare and Medicaid Services.

Pharmacy benefit managers, or PBMs, help many health insurers, including Medicare drug plan issuers, negotiate with drug manufacturers. PBMs may get enrollment-based or prescription-volume-based fees from the customers. They may also get compensation based on the size of the discounts they have negotiated.

Drug manufacturers and others have argued the discount-based compensation may give PBMs an incentive to push the full list prices of drugs higher, to maximize the size of the discounts they can negotiate.

GAO Report Details

The GAO is an arm of Congress that helps members of Congress understand what's happening, both inside the federal government and outside the government.

GAO officials say they developed the new report in response to questions about how much Part D plan issuers really use PBMs; trends in rebates and other price concessions; and how PBMs actually generate their revenue.

Members of the GAO team that worked on the report found that issuers used PBMs to manage 74% of the drug benefit management services they used from 2014 through 2016.

The GAO found 103 PBMs serving issuers of 624 Part D plan sponsor contracts in 2016, but five PBMs — CVS Caremark, OptumRx, Express Scripts, Medimpact, and Argus — dominated the market.

Officials reported that the PBMs they studied passed $18 billion of the rebates they received in 2016 on to the plan sponsors and kept $74.3 million of the rebates.

Health insurers and PBMs told the GAO team that they thought PBMs' drug utilization management services had little effect on patients' access to appropriate drugs, or use of appropriate drugs.

"Representatives of the three drug manufacturers we interviewed told us that utilization management services limit medication adherence and access to medications by, for example, delaying therapy to needed drugs," John Dicken, a GAO director, wrote in an account of the GAO team's findings.