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    Are Rebates Responsible for Higher Drug Costs?

    A new study shows how the Medicare donut hole could be costing patients.

    Pills on Money

    Drug rebates are often touted as a way to reduce overall drug costs, but new research published in JAMA Internal Medicine argues that rebates end up driving up costs for Medicare Part D patients and for Medicare as a whole.

    The article, “Association of Prescription Drug Price Rebates in Medicare Part D with Patient Out-of-Pocket and Federal Spending” examines how Medicare Part D drug rebates may increase costs for beneficiaries and for Medicare, but decrease cost for pharmaceutical manufacturers and Part D plan sponsors.

    The problem

    The problem, according to the study, is the difference between the net price and the list price of a drug. The net price is a reduced price when a manufacturer works with a payer (in the case of Medicare, the Part D plan sponsor and the PBM working on its behalf). The list price is the price paid by the pharmacy, which then receives a negotiated price from the payer when it dispenses the drug. The study states that although the negotiated and list prices differ, “they are usually reasonable approximations of each other.” Over time, the gap between the net and list prices has widened due to an increase in list prices and an increase in rebate percentages.

    Figure 1Fig. 1The authors of the study concluded that because the price paid by patients for drugs is determined by the list price, not the net price, the payment burden shifts from manufacturers and sponsors to patients and Medicare (Fig. 1).  For the first $3,700 of annual drug spending, the patient pays a $400 deductible, and then drug costs are shared between the patient and the payer, 25% and 75%, respectively. After this comes the “donut hole,” where the patient, payer, and manufacturer pay 40%, 10%, and 50%, respectively. If a patient needs more medications, catastrophic coverage phase kicks in at $8071, and Medicare pays 80%, plans 15%, and patients 5%.

    During these phases, patients often pay flat fee copayments, but more and more prescriptions require a patient to pay up to 100% of the drug’s price through deductibles or a fixed percentage, which is determined by the negotiated price and not the net price.

    Up next: What this means for patients

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