Higher Rebates for Brand-Name Drugs Result in Lower Costs for Medicaid Compared to Medicare Part D

OIG found that Medicaid's net unit drug costs (i.e., pharmacy reimbursement minus rebates) were much lower than net unit drug costs under Part D because of substantially higher Medicaid rebates for brand-name drugs.

Part D sponsors and State Medicaid agencies paid pharmacies roughly the same prices for brand-name drugs. However, Medicaid recouped 45 percent of its drug spending in rebates ($2.9 billion in rebates compared to $6.4 billion in expenditures), while Part D sponsors recouped 19 percent of their drug spending in rebates ($4.5 billion in rebates compared to $24 billion in expenditures).

For generic drugs, the median price Medicaid paid pharmacies was 3 percent more than the median price Part D sponsors paid. Rebates for generic drugs under both programs were negligible.

This report fulfills section 3313(b) of the Affordable Care Act, P.L. 111-148, which directs OIG to submit a report that (1) compares the prices paid (including rebates) for 200 covered Part D drugs to the prices paid (including rebates) for the same drugs by State plans under Medicaid and (2) determine the impact of price differences. We included the top 100 (by expenditure) brand-name drugs and the top 100 (by expenditure) generic drugs in our review and used drug reimbursement and rebate data from 2009.

Under Part D, sponsors negotiate rebates with drug manufacturers to reduce the costs of drug coverage. By contrast, under Medicaid, drug manufacturers must pay rebates for covered drugs to State Medicaid programs according to a unit rebate amount calculation defined by law.

Through 2005, Medicaid covered prescription drugs for dual eligible beneficiaries (i.e., beneficiaries eligible for both Medicare and Medicaid). When Medicare Part D was implemented in 2006, dual eligibles' drug coverage was shifted from Medicaid to Medicare Part D. As a result, Medicaid drug expenditures decreased by almost half from 2005 to 2006 (from $43.2 billion to $22.5 billion) and have remained relatively steady. Part D expenditures totaled $61 billion in 2009.

OIG concluded that given the potential impact on beneficiary and Government expenditures, CMS should continually examine differences in rebates across Medicaid and Part D.