Medicare Part D rebates leap as PBMs drive hard bargains, but patients don't benefit

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A Centers for Medicare and Medicaid Services report shines a light on increased rebates and price concessions in Medicare Part D.

As the drug industry braces for fresh pricing action as vowed by President Donald Trump, a report by the Centers for Medicare and Medicaid Services documents a “significant” increase in rebates in Part D prescription plans.

CMS says there’s a “growing disparity” between gross costs, calculated at list prices, and net costs, which take into account payments and rebates after a purchase—such as those drugmakers promise to pharmacy benefits managers in exchange for formulary placement.

Rebates and other postpurchase price concessions grew to 17% of total drug costs in 2017, up from 11% in 2010. They’ve nearly doubled on a per-member basis over that period.

The numbers were unveiled at a time when PBMs have found themselves and their discount negotiations under scrutiny. Pharma executives—including Mylan CEO Heather Bresch, amid the EpiPen pricing scandal—have blamed PBM rebates for "incentivizing" price increases.

Bernstein analyst Ronny Gal wrote the new CMS report documents “a very important set of facts" about where drug dollars are going in Part D. “The PBM practice is another strategy which will likely come under scrutiny,” he said.

As the report states, the trend comes with “significant" implications. For patients, the shift to high prices and high rebates means more out-of-pocket spending. Medicare Part D plan members are responsible for a share of list prices on medicines.  Payer negotiations for lower net prices don’t benefit individual patients.

The trend is also pushing some drug costs onto the government. Because prices—and thus upfront costs—are higher, patients are quickly exhausting their Part D benefits. At that point, they move into a catastrophic coverage category, where Medicare pays for about 80% of drug costs.

However, as CMS notes, rebates and other discount payments are included in calculations for premiums and for Medicare’s direct subsidy payments to Part D sponsors. That means a trend toward bigger rebates could lower premiums and potentially save government expenses elsewhere. CMS says the “net effects” of the trend aren’t clear.

CMS’ report comes on the heels of a study—sponsored by industry group PhRMA—that found behind-the-scenes rebates have been increasing in recent years. In 2015, branded pharma companies kept less than half of the total money spent on prescription drugs in the U.S., the report found. That total includes spending on generics.

As industry-watchers know, both publications come during a time of intense attention on pricing in the drug industry. President Donald Trump previously said pharma is "getting away with murder" and vowed to implement competitive bidding and Medicare price negotiation. Some companies have committed to price hikes only in the single digits in response to the controversy.