Does a recent report by the U.S. Department of Health and Human Services’ Office of the Inspector General (OIG) raise questions about privately managed pharmacy benefits?
The OIG compared prescription drug rebates negotiated by private companies in the privately managed Medicare Part D program and those rebates resulting from the statutorily mandated formula in the federal-state Medicaid program. The discrepancies were significant.
Medicare Part D is a privately run system that purchases far more brand-name prescription drugs than Medicaid ($24 billion vs. $6.4 billion in 2009) and in which managed care companies, or their contracted entities such as pharmacy benefit managers (PBMs), have a profit incentive to negotiate and maximize manufacturer rebates. Given that far greater purchasing power/leverage and the profit motive of negotiators, one would think that these managed care companies would produce rebate revenue for Medicare Part D well in excess of a passive federal statute governing Medicaid, right?
By contrast, the OIG found that, for the same 100 brand-name drugs examined, rebates reduced Part D expenditures by 19% and Medicaid expenditures by 45%. Put another way, Medicaid collected nearly two-thirds as much in rebates as Part D ($2.9 billion vs. $4.5 billion) for brand-name drugs, despite having only about one-fourth of the expenditures ($6.4 billion vs. $24 billion).
Further, this discrepancy appears to be on the rise. Between 2007 and 2009, Medicaid rebates as a percentage of all prescription drug expenditures (not just the 100 brand-name drugs sampled) went from 29% to 35%, largely because Medicaid does a better job keeping pace with rising drug costs than Medicare Part D.
While not in the OIG report, it’s also true that privately managed care comes with administrative costs and executive compensation that far exceed those in a government-administered program like Medicaid.
The OIG report also reminds us that Medicare Part D premiums are higher than they would otherwise be if plan sponsors, including PBMs, didn’t consistently underestimate their rebate revenue. It’s true that some of that revenue is recouped by Medicare in a year-end reconciliation, but not for patients paying the premiums.
Of course, the largest source of pharmacy savings for Medicaid is by increasing the appropriate use of generic drugs. In Massachusetts’ Medicaid system they have achieved a 79.3% generic dispensing rate, and did so under a fee-for-service model (not managed care). If all other states could match the Massachusetts rate, the Medicaid program could save $5.14 billion. Community pharmacists can help, as they dispense generic drugs 10-13% more often than PBM-owned mail order pharmacies.