Congressional Watchdog: Rebates Increase Drug Costs for Seniors

A system of kickbacks between drugmakers and drug middlemen is increasing costs for seniors on Medicare, the U.S. Government Accountability Office said in a fact sheet that was released Tuesday. 

The report by the congressional watchdog casts doubt on claims by the middlemen — known as pharmacy benefit managers or PBMs — that they save money for consumers.

The Centers for Medicare and Medicaid Services administers the health program for retirees under which more than $200 billion in taxpayer money was paid out for prescription drugs in 2021 alone. 

Much has been made of the fact that the mammoth agency, known as CMS, began last month to negotiate prices of certain medicines with drugmakers under the Inflation Reduction Act of 2022. But the GAO report released Tuesday said that the Medicare administrator has been more passive about a practice that likely has more impact on drug pricing.

PBMs aren’t well known, but they’re hugely important players in the drug-supply chain. The three biggest, CVS Caremark, OptumRx and Express Scripts, are each owned by a company that also owns a top-ten health insurer — Aetna, UnitedHealth and Cigna, respectively.

The PBMs represent those and other private insurers — which also represent Medicare and Medicaid patients — in drug transactions. They create pharmacy networks and they determine how much to reimburse them for drugs, even though each big PBM is owned by a company that also acts as a pharmacy in one capacity or another.

Each of the big-three PBMs is so big that combined they control an estimated 80% of the marketplace. And importantly for the GAO report, they create “formularies” — lists of drugs that are covered by insurance.

They use their control over drug benefits for so many millions to force big discounts out of drugmakers in the form of rebates, fees and other payments. 

It might sound harsh to call such payments kickbacks. But the PBMs and drugmakers literally rely on an exemption from federal anti-kickback laws to engage in the practice.

Much of the data regarding these discounts is secret, but the GAO said that the PBMs in 2021 collected almost $50 billion in rebates from drugmakers from the Medicare Part D program alone.

However, the congressional watchdog said, the Medicare administrator hasn’t been monitoring how or why the PBMs are deciding which drugs to cover. And while the PBMs and the insurers are supposed to be representing Medicare recipients, they might be giving seniors the shaft, the GAO said.

“The Centers for Medicare & Medicaid Services (CMS) uses drug rebate data to help ensure its plan sponsor payments are accurate, but CMS officials stated they do not use this data in its oversight of plan formularies,” the GAO fact sheet said. 

There’s reason to believe that as a general matter, drugmakers increase their list prices in response to the ever steeper rebates and discounts they provide to PBMs. A 2020 analysis by the University of Southern California’s Schaeffer Center determined that every $1 increase in rebates translated, on average, into a $1.17 increase in list prices.

Those are the prices you pay if you don’t have insurance. They’re also often the basis on which deductibles and copayments are calculated, so the higher the list price, the higher your out-of-pocket expenses are likely to be.

That’s just what the GAO’s study determined was happening to seniors who participate in Medicare Part D. It determined that plan sponsors — insurance companies offering Part D plans and the PBMs representing them — might be saving money from rebates. 

Seniors on Medicare? Not so much.

“… rebates do not lower individual beneficiary payments for drugs, as these are based on the gross cost (or list price) of the drug before accounting for rebates,” the report said. “Thus drugs with higher gross costs generally result in higher beneficiary payments relative to payments for competing drugs with lower gross costs. GAO found payments by beneficiaries were more than plan sponsor payments, after accounting for rebates, for 79 of the 100 drugs receiving the most rebates.”

The GAO found that for 79 of the highest rebated drugs it analyzed in 2021, Medicare recipients paid $21 billion, while the plan sponsors — many of which are owned by the same companies that own the big PBMs — paid just $5.3 billion.

The Federal Trade Commission last year announced that it was opening an investigation into the big PBMs over possible anticompetitive practices. Ohio Attorney General Dave Yost earlier this year filed a state antitrust suit against Express Scripts, some smaller PBMs and some insurers.

But CMS, the agency that oversees Medicare and Medicaid, claims it isn’t allowed to consider whether PBMs are abusing their control over which drugs get covered because “CMS is statutorily prohibited from interfering with drug manufacturer and plan sponsor negotiations,” the GAO report said. “However, monitoring rebate and expenditure data would not require CMS to interfere with negotiations between plan sponsors and manufacturers, and it could provide CMS and Congress insight on the extent to which rebates’ influence on formularies could discourage enrollment of certain beneficiaries.”

The congressional watchdog said that CMS should study the effects of PBM drug coverage decisions on Medicare beneficiaries “to assess whether rebate practices are likely to substantially discourage enrollment by certain beneficiaries.”

Marty Schladen has been a reporter for decades, working in Indiana, Texas and other places before returning to his native Ohio to work at The Columbus Dispatch in 2017. He’s won state and national journalism awards for investigations into utility regulation, public corruption, the environment, prescription drug spending and other matters.

Reprinted with Permission from Ohio Capital Journal – By Marty Schladen