CBO predicts more Medicare spending with drug rebate proposal


Medicare spending on pharmaceuticals is projected to increase if the Centers for Medicare & Medicaid Services finalizes changes to drug rebates in the Medicare program.

Pills and capsules atop a spread of $100 bills Kenishirotie/Thinkstock

The Congressional Budget Office is estimating that Medicare spending would increase by $170 billion from 2020-2029 if the rebate rule goes into effect, according to a report released May 2.

The proposed rule, issued Jan. 31, would make it illegal for drug manufacturers to pay rebates to health plans and pharmacy benefit managers in return for better formulary placement. Instead of rebates, manufacturers could offer discounts directly to beneficiaries by lowering list prices or making a payment to the pharmacy for the full amount of the negotiated discount – a chargeback. Under the proposal, a beneficiary’s cost sharing would be based on the lower list price or the price after the chargeback.

The CBO’s projected spending increases are based on the assumption that manufacturers will withhold 15% of current-law rebates, as well as increases in federal subsidies for premiums, changes in annual thresholds to beneficiary cost sharing, and the cost of implementing the chargeback system.

The agency expects premiums to rise, as many plans currently use the rebates they receive from drug companies to lower premiums across the board.

However, some beneficiaries “would pay lower prices on their prescription drugs, and for some beneficiaries, those reductions would be greater than their premium increases,” the CBO stated in its report. For beneficiaries who use few drugs or who use drugs that have no significant rebates, “the premium increase would outweigh the price reduction.”

Another reason federal spending would increase under this proposal is an expected increase in utilization that would come with the lowering of prices.

“In CBO’s estimate, the additional Part D utilization stemming from implementing the proposed rule would increase federal spending for beneficiaries who are not enrolled in the low-income subsidy program over the 2020-2029 period by a total of about 2% or $10 billion,” the report noted.

But the increase in utilization would have a net positive effect on Medicare spending for this population, as more beneficiaries followed their drug regimens resulting in lower spending for physician and hospital services under Medicare Part A and Part B by an estimated $20 billion over the same period, according to the CBO.

“On net, those effects are projected to reduce Medicare spending by $10 billion over the 2020-2029 period,” according to the report.

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