Part D Gap Rebates Boost Medicare Rx Spending To 9% Gain In 2010

Drug spending by the Medicare program increased more than by Medicaid or by private payers in 2010, according to an analysis by CMS; expenditures in Medicaid and by private insurance were level with the previous year and consumer out-of-pocket spending declined. Total drug spending across-the-board rose 1.2% to $259 billion.

Government rebates intended to help Medicare Part D beneficiaries with the cost of their drugs once they reached the coverage gap contributed to a 9% increase in Medicare spending on prescription drugs in 2010, according to an article on national health expenditures by analysts in the Centers for Medicare and Medicaid Services Office of the Actuary, published Jan. 9 in Health Affairs.

Medicare drug expenditures reached $59.5 billion in 2010, driven primarily by accelerated spending growth for Part D drugs. Spending on “non Part D drugs,” which include Part B drugs administered in physicians’ offices and any drug coverage provided by Medicare Advantage plans, experienced slower growth in 2010 compared to the year before, the analysis found.

The article states “the faster growth in Part D prescription drug spending was due, in part, to the one-time, tax-free $250 rebate checks” send to any enrollee who reached the coverage gap, also known as the donut hole, as required by the Affordable Care Act (ACA). The checks went to nearly 4 million beneficiaries in 2010 and provided nearly $1 billion in out-of-pocket “relief,” according to HHS. Once a Part D beneficiary reaches the gap, they are responsible for the full cost of their drugs, which has led members in the past to skip or cut back on their drug regimens or at least switch to a less expensive drug or a generic.

CMS also attributed the increase in Part D drug expenditures to a related development: “faster growth in Medicare payments for individual reinsurance (for enrollees who reach the catastrophic phase of the benefit).” Once total drug costs for seniors in the coverage gap reach an annually specified threshold, the beneficiaries progress to a catastrophic coverage phase of the Part D benefit, in which Medicare picks up 80% of drug costs. The rebates to beneficiaries may have helped more of them move through the gap as they continued to fill prescriptions.

The $250 assistance program was replaced in 2011 by the coverage gap drug discount program, in which drug manufacturers provide 50% discounts on the negotiated price of brand drugs for beneficiaries in the gap. The discount is likely to have further accelerated Medicare drug spending growth last year. In its score for ACA, the Congressional Budget Office estimated the discount program would increase Medicare costs by $900 million in 2011 and by a total of $17.8 billion over 10 years (Also see "Donut Hole Discounts Would Cost Medicare $17.4 Bil.; AARP Wants Phase Out" - Pink Sheet, 21 Sep, 2009.). Beneficiaries’ cost-sharing in the donut hole also will steadily decrease through a phase-out of the donut hole being funded with a government subsidy beginning in 2013. The phase-out will be complete in 2020.

Medicaid Spending Offset By Drug Rebates

Medicaid spending on drugs was stable in 2010, up just 0.3%, following an increase of 6.1% in 2009. Expenditures for the program totaled $20.2 billion in 2010, including $13.6 billion from the federal government and $6.5 billion from states and local governments.

The CMS analysts note that increased mandatory drug rebates in the Medicaid program “had the effect of reducing total spending for retail sales of prescription drugs in 2010, contributing to its historically low rate of growth.”

ACA required that mandatory rebates for branded drug increase from a 15.1% of the average manufacturer price to 23.1%, and that rebates for generic drugs increase from 11% of AMP to 13%. The law also mandates that drug firms provide statutory Medicaid drug rebates to states for drugs provided in managed care organizations. All of the increased rebates were in effect during 2010.

Private health insurance spending on prescription drugs, which makes up the largest portion of spending (45%) across all types of coverage, declined by 0.2% in 2010. The decrease reflects the continued overall economic downturn, which led to slower growth in the volume of drugs consumed and an increase in the use of generic drugs. Private health insurers spent $117 billion on drug coverage in 2010. Also driven by economic pressures, consumer out-of-pocket spending on drugs declined 4.1% to $48.8 billion.