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 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2021–
Change in Outlays 0 0 -4 -21 -25 -23 -21 -17 -20 -17 -50 -148

This option would take effect in January 2023.

Medicare Part D is a voluntary, federally subsidized prescription drug benefit delivered to beneficiaries by private-sector plans. Private drug plans can limit the costs they incur for providing benefits to Part D enrollees by negotiating to receive rebates from manufacturers of brand-name drugs in return for charging enrollees smaller copayments for those drugs. Currently, the rebates on drug sales to Medicare beneficiaries enrolled in Part D’s low-income subsidy (LIS) program, most of whom are also enrolled in Medicaid, are established in the same way as those for drugs used by other Part D enrollees.

Before Part D took effect in 2006, most LIS enrollees received drug coverage through Medicaid, where rebates on drug sales are set differently. Under federal law, drug manufacturers that participate in Medicaid must pay a portion of their revenues from that program back to the federal and state governments through rebates. Those rebates are equal to at least 23.1 percent of the average manufacturer price (AMP) for a drug. (The AMP is the amount, on average, that manufacturers receive for sales to retail pharmacies.) If some purchasers in the private sector obtain a price lower than 23.1 percent off of the AMP, then Medicaid’s basic rebate is increased to match the lowest price paid by private-sector purchasers. If a drug’s price rises faster than overall inflation, the drug manufacturer pays a larger rebate. On average, the rebates negotiated for brand-name drugs in Medicare Part D are smaller than the statutory discounts obtained by Medicaid.

This option would establish a minimum rebate for brand-name drugs sold to LIS enrollees in Medicare Part D. Manufacturers would be required to pay the federal government an amount equal to the difference (if any) between the minimum rebate for a given drug and the average negotiated rebate that manufacturers paid to plans for all purchases of that drug in Part D. The minimum rebate would equal 23.1 percent of the drug’s AMP plus an additional, inflation-based amount. (That rebate would be similar to Medicaid’s rebate, except it would not be directly affected by the lowest price paid by private-sector purchasers.) Such rebates would be mandatory for manufacturers who wanted their drugs to be covered by Part B (which covers physicians’ and other outpatient services) and Part D of Medicare, by Medicaid, and by the Veterans Health Administration.

If the average Part D rebate negotiated between the manufacturer and the Part D plans exceeded the minimum rebate for a given drug, then no additional payment would be owed to the federal government for that drug. However, under this option, only negotiated rebates that apply equally to all Part D enrollees in a given plan would count toward the average negotiated rebate. For example, current law requires drugmakers to provide a discount on purchases of certain brand-name drugs by non-LIS Part D enrollees but does not require them to provide a discount on those purchases made by LIS Part D enrollees; that discount, therefore, would not reduce the rebates owed to the federal government under this option.