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Medicare and Medicaid Prescription Drug Rebates

Did you know that the net amount Medicare Part D sponsors pay for the top 100 brand-name drugs is substantially higher than what Medicaid pays? In other words, one Government program pays much more than another Government program for the same drugs.

Why is this?

Rebates. Whereas Medicaid recouped 45 percent of its spending on these drugs in manufacturers' rebates, receiving $2.9 billion in rebates for $6.4 billion in expenditures, Medicare Part D sponsors only recouped 19 percent, or $4.5 billion in rebates for $24 billion in expenditures.

OIG's report (PDF) Higher Rebates for Brand-Name Drugs Result in Lower Costs for Medicaid Compared to Medicare Part D sheds light on this discrepancy in rebate collection rates and the impact it has on Federal spending. Under Medicare Part D, sponsors negotiate rebates with drug manufacturers to reduce the costs of drug coverage. The Government is legally prohibited from being involved in these negotiations. In contrast, under Medicaid, drug manufacturers must pay rebates to State Medicaid programs according to a calculation defined by law. In simplified terms, the calculation uses a formula that incorporates:

  • the average price at which the drug is sold to wholesalers or retail community pharmacies,
  • the lowest price at which it is sold, and
  • the rate of inflation versus the rate at which the price of the drug increased.

As the numbers above show, Medicaid's system for determining rebate rates resulted in substantially higher rebates than Part D sponsors negotiated for the top 100 brand-name drugs. The inflation-based additional rebate in Medicaid's system is the primary reason for this. According to (PDF) Medicaid Brand-Name Drugs: Rising Prices Are Offset by Manufacturer Rebates, although published prices and Medicaid payment amounts to pharmacies for brand-name drugs increased at about three times the inflation rate between 2005 and 2010, the Medicaid rebates that manufacturers paid to the States offset these increases.

Given the potential impact of rebates on beneficiary and Government expenditures, OIG recommends that Centers for Medicare & Medicaid Services (CMS) continually examine this issue.

Issues with the Medicaid Rebate Program

Although the Medicaid drug rebate program lowers drug coverage costs considerably, OIG identified opportunities for improvements in this program. In regard to drug manufacturers, the report (PDF) Drug Manufacturers' Noncompliance with Average Manufacturer Price Reporting Requirements found that in 2008, more than half of manufacturers did not fully comply with quarterly submission requirements for average manufacturers' price data which is used to calculate the rebate amounts owed to States under the Medicaid drug rebate program. Another report, (PDF) Review of Additional Rebates for Brand-Name Drugs with Multiple Versions, found that manufacturers could develop new versions of existing brand-name drugs to avoid paying the rebate triggered when the cost of a drug rises more than the inflation rate. Provisions of the Affordable Care Act are intended to prevent manufacturers from avoiding these rebate obligations.

There are also some issues with States collections of drug rebates. In 2005, OIG issued a report on audits of the Medicaid drug rebate program in 49 States and the District of Columbia. These audits found that 45 States and the District of Columbia had weaknesses in accountability and internal controls over their rebate programs. In 2011, (PDF) Nationwide Rollup Report for Medicaid Drug Rebate Collections reported that out of these 45 States and the District of Columbia, just 14 States and the District of Columbia implemented all of the recommendations from the 2005 audits. According to (PDF) States' Collections of Medicaid Rebates for Physician-Administered Drugs, one class of drugs - injections and infusions administered by physicians - presented particular problems for States' collections. Specifically, many States reported difficulties with claims data that resulted in manufacturer disputes and thereby prevented or delayed States from collecting all Medicaid rebates owed to them.

Possible Additional Applications of the Medicaid Rebates Program

The report (PDF) Review of Generic Drug Price Increases found that if the same inflation-related rebates for brand-name drugs under the Medicaid program were extended to generic drugs, Medicaid would have received nearly $1 billion in additional rebates from 1991-2004.

Additionally, the Senate Committee on Aging requested that OIG identify the potential savings if the Medicaid rebate program were implemented for Medicare Part B. Through an (PDF) analysis of 20 high-dollar Part B drugs, we determined that Medicare and its beneficiaries would have potentially saved between $1.9 billion and $2.4 billion in 2010 if manufacturers of Part B drugs had been required to pay rebates similar to those under Medicaid for these 20 drugs.

For more information on OIG's work on prescription drugs, see our past reports.

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