Medicare Overpays for Generic Drugs: Report

Some private insurance providers sponsoring Medicare Part D marked up certain generic drugs an average of five times what it costs to acquire the drug.

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Some private insurance providers sponsoring Medicare Part D marked up certain generic drugs an average of five times what it costs to acquire the drug, data from the Centers for Medicare & Medicaid Services (CMS) show.

The data were presented in a research letter published in the Journal of the American Medical Association (JAMA) on Dec. 5 in an evaluation by researchers at the University of California–San Diego, West Health Policy Center in Washington, D.C., and the University of Washington.

How Prescriptions Work

Pharmacy benefit managers (PBMs) are companies that manage prescriptions for health insurers. They’re the middlemen, so to speak, between the drug manufacturer, the pharmacy, and the patient, determining the total drug cost for insurers, shaping total costs for patients, and establishing how much a pharmacy will be paid.

According to studies in Medicaid, some pharmacy benefit managers pay pharmacies as much as 10 times the amount for generic drugs, a cost which is then passed onto the patient. Pharmacy benefit managers then recoup the costs from pharmacies through clawbacks, the researchers wrote.

Determined to establish if the same price-gouging occurred within Medicare as well, the research team identified the top 50 generic drugs on which Medicare Part D users spent money in 2021. The research team collected reimbursement costs for six major insurance providers for each drug and compared them to the pharmacy’s cost to acquire the drug.

Researchers found example after example of inflated drug prices: Abiraterone, a hormone therapy drug prescribed to treat advanced prostate cancer, cost $2.32 a pill for the pharmacy but was sold for up to $62.71 a pill. Ezetimibe, a nonstatin agent prescribed to treat hyperlipidemia, costs 16 cents a pill for the pharmacy but was sold for up to $5.19 a pill to patients.

In summary, researchers found that reimbursement rates were highest for Rite Aid, with a cost ratio of 10:6, followed by Cigna, CVS Health, Centene, and Humana. Rite Aid reimbursed 12 drugs at 10 times the cost, followed by Cigna at nine drugs, CVS Health at five drugs, Humana at two, and UnitedHealth at one.

Why It Matters

While Medicare Part D is a voluntary prescription drug benefit, it serves as a lifeline for over 50 million Americans enrolled in Medicare. Generic drugs represent over 90 percent of dispensed medications, researchers said, and excessive reimbursements result in increased out-of-pocket costs for Medicare recipients. The inflated expenses are especially difficult as Medicare Part D costs are already slated to rise.

Medicare Part D premiums could increase by 42 percent to 57 percent in 2024, a new analysis by HealthView Services has found. The key driver of projected premium hikes is a change in the Inflation Reduction Act, which will lower the maximum out-of-pocket spending cap for Medicare Part D prescription drugs from $7,050 in 2023 to $2,000 in 2025. This will reduce co-pays for some, especially those with chronic conditions.

However, financial liability will shift to insurance companies, expected to cover 60 percent to 80 percent of costs once patients hit the new $2,000 cap.

With roughly a quarter of Medicare recipients exceeding this threshold, HealthView’s analysis suggests carriers will raise premiums to account for their increased coverage requirements. The higher premiums are a way for insurance companies to cover the expected cost increase.

So while the Inflation Reduction Act aims to lower overall health care costs for retirees, it may actually increase 2024–2025 Part D premiums for 75 percent of enrollees who also see no co-pay relief.

Reform Needed

The Senate Finance Committee has noted the inflation practice of pharmacy benefit managers. In 2022, the committee passed the Modernizing and Ensuring PBM Accountability Act, which requires more transparency, accountability, and competition for pharmacy benefit manager practices in the supply chain. The purpose of the legislation is to lower out-of-pocket costs for patients.

When drafting the legislation’s framework, the committee noted that “federal policy has not kept pace with these developments and evolving market dynamics, which have a significant impact on prescription drug costs for health programs within Senate Finance Committee’s jurisdiction and the patients they serve.”

Additional federal legislative goals include the following:

• Removing pharmacy benefit manager compensation from drug prices.
• Enhancing pharmacy benefit manager accountability.
• Ensuring discounts negotiated for seniors are meaningful.
• Increasing transparency to better understand financial flows across the pharmacy supply chain.