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The Medicare Part D Drug Rebate Proposal: Rebutting An Unpersuasive Critique

December 28th, 2012

A proposal to require manufacturers to pay a minimum rebate on drugs covered under Medicare Part D for those beneficiaries who receive the program’s Low-Income Subsidy (LIS) has received considerable attention during the current debate over the federal budget. Through mandating discounts in the form of rebates, this proposal would ensure lower drug prices than currently negotiated by private Part D drug plans.

A study by the HHS Inspector General in August 2011 found that rebates negotiated by private plans average about one-third the size of those received in the Medicaid program, where most LIS beneficiaries received drug coverage prior to the implementation of Part D. The proposal is scored by the Congressional Budget Office as achieving savings of $137 billion over 10 years (2013-2022) or about $15 billion in the first full year of implementation.

The rebate approach has been part of Medicaid drug pricing for over 20 years and includes three components. The rebate is set as the greater of (1) a minimum rebate, currently set at 23.1 percent of the average manufacturer price (AMP) for most brand-name drugs and (2) the difference between the AMP and the “best price,” defined as the lowest manufacturer price paid for a prescription drug by any private purchaser. In addition, if a brand drug’s AMP rises faster than inflation, the minimum rebate is increased based on the change in AMP compared to the consumer price index.

It has come to our attention that a number of interested parties have signed a letter, sponsored by the Council on Affordable Health Coverage, expressing concerns about this budget proposal. The analysis upon which the concerns are based is that by Douglas Holtz-Eakin and colleagues. They offer two arguments against this policy, which they claim would increase Part D premiums by 20 to 40 percent and shift costs to employers, Medicaid, and non-LIS Medicare beneficiaries. They are:

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