Life Science Compliance Update

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March 14, 2017

CMS Releases Report on Drug Rebates


The Centers for Medicare and Medicaid Services (CMS) has released a new report highlighting the growth in rebates from drug manufacturers to pharmacy benefit managers (PBMs) and insurers. However, the report notes that these rebates don’t necessarily amount to savings for beneficiaries and Medicare. Rebates paid by manufactures are referred to as “Direct and Indirect Remuneration” (DIR) by CMS, and such rebates are allegedly increasingly allowing for private Part D insurers to keep costs down, but are less impactful for keeping beneficiary cost sharing low and for holding down Medicare spending in the catastrophic phase of the benefit.

The report highlights the problem of a pricing scheme where manufacturers introduce drugs at a high list price (“point-of-sale”), with the expectation that the initial price will somehow be negotiated downward, “the cost of rebates and other price concessions received after the point-of-sale, is built into the list price charged at the point-of-sale.” Since beneficiary cost sharing is based on the list price, and because Medicare absorbs most costs in the catastrophic benefit, high list prices contribute to high spending for both beneficiaries and the program.

CMS notes that between 2010 and 2015, total DIR grew roughly twenty-two percent per year, while per-member per-month (PMPM) DIR grew about fourteen percent per year. During the same time period, total Part D gross drug costs grew about twelve percent per year and PMPM Part D gross drug costs grew slightly less than five percent per year.

The report details how the combination of higher drug prices and higher DIR can impact the benefit in the following ways:

Beneficiary Cost-Sharing

CMS believes that DIR may hold down total program expenses (and beneficiary premiums), but it does not reduce the cost of drugs for beneficiaries at the point-of-sale. Generally, this results in higher beneficiary cost-sharing obligations as cost-sharing is often assessed as a percentage of the list price;

Medicare Subsidy Payments

Medicare pays the Part D cost-sharing obligations on behalf of low income beneficiaries that are also eligible for Medicaid, roughly twelve million beneficiaries in 2015. As the burden on beneficiary cost-sharing grows, Medicare’s costs for these beneficiaries also grow. Additionally, CMS states that, “higher beneficiary cost-sharing also results in the quicker progression of Part D enrollees through the Part D drug benefit phases and potentially leads to higher costs in the catastrophic phase, where Medicare liability is generally around eighty percent;”


Plan Liability

As illustrated by Figure 3 in the report, higher levels of DIR also have the impact of moderating the financial liability of Part D plans, which counteracts the overall growth of Part D drug spending. High cost-high DIR arrangements ease the financial burden created by Part D plans by essentially shifting costs to the catastrophic phase of the benefit, where plan liability is limited.


The report more or less implies that rebates contribute to Part D spending growth because the current structure of the Part D benefit incentivizes plans to negotiate high rebates to keep their costs down, which in turn leaves Medicare and its beneficiaries on the hook for high spending due to high drug prices.

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