Mandatory Spending

Function 570 - Medicare

Require Manufacturers to Pay a Minimum Rebate on Drugs Covered Under Part D of Medicare for Low-Income Beneficiaries

CBO periodically issues a compendium of policy options (called Options for Reducing the Deficit) covering a broad range of issues, as well as separate reports that include options for changing federal tax and spending policies in particular areas. This option appears in one of those publications. The options are derived from many sources and reflect a range of possibilities. For each option, CBO presents an estimate of its effects on the budget but makes no recommendations. Inclusion or exclusion of any particular option does not imply an endorsement or rejection by CBO.

Billions of dollars 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2015-2019 2015-2024
Change in Mandatory Outlays 0 * -5 -12 -14 -14 -14 -13 -14 -17 -31 -103

Notes: This option would take effect in January 2017. Estimates are relative to CBO’s August 2014 baseline projections.

* = between zero and $500 million.

Before the establishment of Part D in 2006, Medicare beneficiaries who were also eligible for full benefits from Medicaid—known as “dual-eligible beneficiaries”—received drug coverage through Medicaid. That program requires drug manufacturers to pay state and federal governments a significant rebate on their sales to Medicaid enrollees. The rebate amount is currently 23.1 percent of the price that manufacturers receive for sales to retail pharmacies (known as the average manufacturer price). Additional rebates are required if a drug’s price rises faster than overall inflation.

When Part D of Medicare was established, dual-eligible beneficiaries were enrolled automatically in a low-income-subsidy (LIS) program in Part D, which typically covers the premiums and most of the cost sharing required under the basic Part D benefit. Currently, the rebates for drugs used by LIS enrollees are established in the same way as those for drugs used by other Part D enrollees: through negotiations between private Part D plans and drug makers.

This option would require manufacturers of brand-name drugs to pay the federal government a rebate on drugs purchased by enrollees in the Part D LIS program, starting in calendar year 2017. As with the current rebate system for Medicaid, manufacturers would have to pay a total rebate of at least 23.1 percent of a drug’s average manufacturer price, plus an additional rebate for price increases that exceeded the rate of inflation since the drug’s introduction. If a drug manufacturer already provides discounts or rebates to Part D plans that apply equally to all Part D enrollees, any difference between those discounts or rebates and the total rebate amount that the manufacturer would owe under this option would be paid to the federal government. Manufacturers would be required to participate in this rebate program in order to have their drugs covered by Parts B and D of Medicare, by Medicaid, and by the Veterans Health Administration.