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Pharmacy benefit managers keep less than 1% percent of rebates for Medicare Part D drugs, GAO says

Part D plan sponsors mainly used five PBMs in 2016: CVS Caremark, OptumRx, Express Scripts, Medimpact and Argus.

Susan Morse, Managing Editor

A recent Government Accountability Office report on Part D drug expenditures and the revenue received by pharmacy benefit managers shows that while PBMs and plan sponsors are successful in helping to lower some prescription prices, more needs to be done to bring down costs, said House Ways & Means Committee Chairman Richard E. Neal.

Medicare Part D plan sponsors used pharmacy benefit managers to provide 74 percent of drug benefit management services and performed the remaining 26 percent of services themselves in 2016 -- the most recent year data was available, according to the report.

Part D plan sponsors mainly used five PBMs in 2016: CVS Caremark, OptumRx, Express Scripts, Medimpact and Argus.

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Neal, a Massachusetts Democrat, and Maine Republican Senator Susan Collins,  chairman of the Special Committee on Aging, requested the GAO report. It was released to them in July.  The GAO said it makes reports available to the public 30 days later.


The GAO's review of 20 service agreements between Part D plan sponsors and PBMs found that the primary revenue source for PBMs from services they provided to Part D plans was a volume-based fee paid by plan sponsors based on the number of paid claims that the PBM processed -- a flat monthly per-member, per-month fee paid by plan sponsors, or a combination of the two.

PBMs also earn revenue from the rebates they negotiate with manufacturers for Part D drugs, which accounted for $18 billion of the $26.7 billion in rebates in 2016. 

PBMs retain less than 1 percent of rebates, passing the rest to plan sponsors, the report found.

Rebates and other price concessions -- discounts generally paid by manufacturers to Part D plan sponsors and PBMs after the sale of a drug at the pharmacy -- grew faster than Part D expenditures from 2014 through 2016.  Total expenditures for the Medicare Part D drug program exceeded $100 billion in 2016.

The amount paid to pharmacies by plan sponsors, or by the PBM on the sponsor's behalf, and by the beneficiary, increased 20 percent, to $145.1 billion, during this same period. Rebates and other price concessions increased 66 percent, to $29 billion.

The negotiation of rebates can include more favorable placement on the sponsor's formulary. The rebate terms do not have to be disclosed to the public, but plan sponsors must report rebate amounts to CMS.

None of the service agreements tied fees to the price of a drug paid to the pharmacy.

Part D plan sponsors may subtract rebates and other price concessions that are passed along to them from their estimated drug costs. When they do, rebates and other price concessions reduce a plan sponsor's estimate of liability that is reflected in bid amounts, which, in turn, reduce beneficiary premiums because they are based in part on the bid amount.

This downward pressure on premiums is one reason that premiums remained relatively unchanged between 2010 and 2015, according to figures from the Centers for Medicare and Medicaid Services, even though total gross Part D drug costs grew about 12 percent per year in that period.

Since Part D beneficiary cost sharing is calculated based on the price of the drug at the time of purchase, before rebates are paid, these beneficiaries pay higher cost sharing than they would if rebates were paid at the point of sale. In addition, higher pre-rebate drug prices may result in beneficiaries more quickly reaching the catastrophic coverage phase, where the federal government's share of drug costs increases, and the plan sponsors' share decreases.

The GAO also examined PBM revenue reported to CMS by Part D plan sponsors in their rebates and other price concession data -- also referred to as direct and indirect remuneration fees, and found that PBMs passed nearly all rebates received from manufacturers through to Part D plan sponsors in 2016.

Part D plan sponsors reported to CMS that, of the approximately $18 billion in rebates that PBMs negotiated with pharmaceutical manufacturers that year, PBMs retained $74.3 million, or about 0.4 percent, and passed through the remaining 99.6 percent to plan sponsors.

PBMs earned little Part D revenue from spread pricing -- keeping the difference between the amount the PBM paid the pharmacy for a drug and the amount the PBM charged the plan for the drug, from 2014 through 2016. PBMs earned about $300,000 from spread pricing in 2016 and earned no revenue from spread pricing in 2014 or 2015.

PBMs generally earn more from spread pricing and rebate retention from commercial plans than they do from Part D.

The 444 highest expenditure, highest utilization brand-name drugs accounted for the majority of expenditures and received the vast majority of rebates and other price concessions in 2016.

In 2016, the highest expenditure, highest utilization brand-name drugs sold in retail pharmacies received discounts off of manufacturer list prices that were significantly higher than those sold in specialty pharmacies.


Congress is increasingly looking to lower the price of drugs and the cost to beneficiaries.

The Department of Health and Human Services and the Food and Drug Administration recently proposed policy changes to allow for the importation of drugs from other countries, including Canada.


"This new report shows that while Medicare Part D plan sponsors and PBMs are successful in helping lower some prescription prices for beneficiaries, more needs to be done to bring those costs down – especially for high-priced drugs," Neal said. "GAO's findings will inform the continuing work my colleagues on the Ways and Means Committee and I do to reduce prescription prices for American families."

Twitter: @SusanJMorse
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