Pharmacy Benefit Managers Pass on Rebates to Part D Drug Plans: GAO

Kenneth J. Terry, MA

August 19, 2019

Pharmacy benefit managers (PBMs) in 2016 passed on nearly all rebates they received from drugmakers to the Medicare Part D drug plans that hired them, according to a new report from the Government Accountability Office (GAO).

Medicare Part D plan sponsors used PBMs to provide 74% of drug benefit management services and performed the remaining 26% of services themselves in 2016, the most recent year for which data are available.

Rebates and other price concessions grew faster than Part D expenditures from 2014 to 2016, the report noted. Gross expenditures (the amount paid to pharmacies directly by drug plans, by PBMs on behalf of insurers, and by Medicare beneficiaries) increased 20% to $145.1 billion. During this period, rebates and other price concessions increased 66% to $29 billion — 20% of 2016 gross expenditures. As a result of the rebates, net spending increased only 13% to $116.1 billion.

According to the GAO, PBMs retained less than 1% of the rebates and passed the rest on to plan sponsors (ie, insurance companies). "Plan sponsors in turn may use rebates to help offset the growth in drug costs, helping control premiums for beneficiaries," the report said. But it is not clear how much these rebates actually lowered premiums.

Brand Name vs Generic

There has been some discussion in Congress about changing the system so that the rebates are used to directly lower prices at the point of sale. A provision to do just that was dropped from a drug pricing bill that the Senate Finance Committee recently passed, according to Modern Healthcare, but Chuck Grassley (R-IA), committee chair, has promised to revive the issue.

Meanwhile, the Trump administration has withdrawn a proposed rule that would have eliminated drug rebates provided to government plans and replaced them with discounts to consumers, as reported by Medscape Medical News.

While the pharmaceutical industry supported this move, PBMs and insurance companies fiercely opposed it. The administration was reportedly concerned about reports that scrapping the rebates could raise Medicare spending by nearly $200 billion.

The GAO study found most of the Part D rebates were on brand name drugs, not generic drugs. The 444 brand name drugs that accounted for most drug spending and use received 90% of the rebates and other price concessions, the GAO said.

Most Part D drug plan agreements with PBMs require them to pass on to them all of the rebates they received from pharmaceutical companies, the report noted. The insurers pay PBMs a volume-based fee based on the number of paid claims they process and/or a flat monthly per-member, per-month fee. PBMs earn little revenue from "spread pricing," in which they keep the difference between the amount they pay the pharmacy for a drug and the amount the PBM charges the plan for the drug, the GAO said.

According to PBM executives interviewed by the GAO, "CMS reporting requirements have removed much of the incentive in Part D for PBMs to earn revenue from spread pricing." PBMs earn more money from spread pricing and rebate retention in their transactions with commercial plans, the report found.

A recent report by the Massachusetts Health Policy Commission (HPC) found that PBMs charge the state's Medicaid managed care and commercial plans significantly higher prices for generic drugs than their actual cost. In the MassHealth Medicaid managed care program, PBM prices for generic drugs were higher than acquisition costs for 95% of the medications analyzed in the fourth quarter of 2018.

Under CMS regulations, state Medicaid fee-for-service programs must use a pass-through pricing model, in which they reimburse pharmacies based on the acquisition cost of a drug plus a dispensing fee, which is about $10 in Massachusetts. However, that rule does not apply to managed care plans that contract with Medicaid.

The HPC report estimated that the share of PBM revenue from spread pricing grew from 22% in 2014 to 54% in 2016 — the same period covered by the GAO report.

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