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April 5, 2019

The Honorable Daniel R. Levinson
Office of Inspector General
Department of Health and Human Services
330 Independence Avenue, SW
Washington DC, 20201
RE: OIG-0936-P
Dear Inspector General Levinson:
The Medicare Payment Advisory Commission (MedPAC) welcomes the opportunity to comment
on the Office of Inspector General (OIG) proposed rule entitled “Removal of safe harbor
protection for rebates involving prescription pharmaceuticals and creation of new safe harbor
protection for certain point-of-sale reductions in price on prescription pharmaceuticals and certain
pharmacy benefit manager service fees,” published in the Federal Register, vol. 84, no. 25, pages
2340 to 2363. We appreciate your staff’s work on the proposed rule, particularly considering the
competing demands on the office.
OIG’s proposed rule would amend the safe harbor regulation governing pharmaceutical
manufacturers’ rebates and discounts, which currently are protected from liability under the federal
anti-kickback statute. Under the proposal, the definition of “discount” would be revised to exclude
reductions in price or remuneration from drug manufacturers (e.g., rebates and discounts) to plan
sponsors in Medicare Part D, Medicaid managed care organizations, or their contracted pharmacy
benefit managers (PBMs), unless the price reduction (or rebate) is required by law. At the same
time, the proposal would create two new safe harbors. The first would permit rebates set in
advance between those same entities so long as the full rebate amount is provided to the dispensing
pharmacy through chargebacks and is reflected in the beneficiary’s out-of-pocket (OOP) cost at
the point of sale. The second would protect pharmaceutical manufacturers’ ability to pay service
fees to PBMs so long as the fees are: 1) consistent with fair market value in an arm’s-length
transaction (i.e., in which buyers and sellers act independently and in their own self interest); 2) a
fixed payment rather than a percentage of sales; and 3) not determined in a manner that takes into
account the volume or value of referrals or business generated between the parties. PBMs would
also need to disclose fee arrangements with manufacturers to the health plans with which they
contract, as well as to the Secretary upon request.
The Commission supports OIG’s objective of constraining growth in prices and spending for
prescription drugs. We recognize that the current gap between drug prices at the pharmacy (what
we refer to as point-of-sale (POS) prices) and prices net of postsale rebates and discounts raises
serious challenges for beneficiary cost sharing and Medicare program spending.

 The Honorable Daniel R. Levinson
Inspector General
Page 2
At the same time, limiting the ability of Part D plan sponsors and their PBMs to use rebates could
also lead to uncertain and potentially undesirable outcomes, and thus the Commission has
substantial concerns about the proposed changes. In this letter, we describe how rebates are used
currently, problems associated with the gap between prices at the pharmacy and prices net of
rebates, and potential effects of the proposed rule on beneficiaries and the Medicare program. We
conclude by describing policy changes that would improve underlying program incentives in Part
D and could potentially help address the current pricing situation.
Rebates are used as a mechanism for price discrimination
For the past several decades, manufacturers have used rebates to negotiate prices for brand-name
drugs that are individualized for different purchasers. The approach of charging different prices to
different payers—known by economists as price discrimination—is used in many industries from
automobiles to airline tickets. For retail pharmaceuticals, payers (such as employers, states, and
plan sponsors) and PBMs under contract to them do not directly purchase or take physical
possession of drugs from manufacturers or wholesalers. Instead, pharmacies buy medicines and
PBMs pay pharmacies for the prescriptions filled by health plan members. However, PBMs
directly receive postsale rebates from manufacturers that effectively discount drug prices and may
be used to lower enrollee premiums or cost-sharing amounts. The size of specific rebates depends
on whether a drug has competing therapies as well as the negotiating leverage of each PBM or
payer—which, in turn, depends on the PBM/payer’s ability to deliver a certain market-share goal
to the manufacturer. Rebates are structured so that a manufacturer might pay a base rebate to the
PBM for placing its product on a plan’s formulary (rather than excluding the drug), but might pay
larger rebates if the drug is placed on a preferred cost-sharing tier or if prior authorization
requirements are waived. In recent years, payers and PBMs have also negotiated “price-protection”
provisions under which the manufacturer agrees to rebate a drug’s mid-year price increases above
a specified threshold.
Manufacturers consider rebate amounts highly proprietary because revealing that information
could alter their negotiating leverage with other payers. If one payer was able to observe the size of
a rebate a manufacturer negotiated with a different payer, the first payer could demand similar
rebate terms. For this reason, the Congressional Budget Office, Federal Trade Commission, and
other economists have suggested that transparency of specific rebate agreements could set in place
conditions for tacit collusion among manufacturers of competing drugs, likely lowering average
rebate amounts and compressing the range of final prices net of rebates. 1 At the same time, the
opaqueness of rebate agreements between manufacturers and PBMs is one important reason that
final drug prices are not transparent to consumers or even to some payers. Some economists

1

Congressional Budget Office. 2008. Increasing transparency in the pricing of health care services and
pharmaceuticals. Economic and budget issue brief. Washington, DC: CBO. Federal Trade Commission. 2009. Letter
from FTC staff to the Hon. James Seward on N.Y. Senate Bill 58. March.
http://www.ftc.gov/sites/default/files/documents/advocacy_documents/ftc-staff-comment-honorable-james-l.sewardconcerning-new-york-senate-bill-58-pharmacy-benefit-managers-pbms/v090006newyorkpbm.pdf. Danzon, P. 2015.
Pharmacy benefit management: Are reporting requirements pro or anti-competitive? International Journal of the
Economics of Business 22(2): 245–261.

 The Honorable Daniel R. Levinson
Inspector General
Page 3
suggest that “contracts with shrouded rebates in a concentrated (PBM) market can result in higher
manufacturer prices and increased profits for PBMs.”2
In the commercial market, payers and health plans negotiate with PBMs over whether they will
receive a share of manufacturers’ rebates and how much they will pay the PBM for each
prescription filled by their members. In previous years, PBMs would often keep most rebate
revenue as compensation for their services plus any “spread” (difference) between amounts
received from payers and amounts paid to pharmacies. In recent years, however, more payers have
negotiated with PBMs to pass through all rebates.3 (Part D requires the pass-through approach.)
Other commercial contracts allow PBMs to retain a percentage of rebates if the PBM takes on the
risk of guaranteeing the payer predictable rebate payments.4 Because there is less or no financial
spread under pass-through pricing, PBMs charge payers administrative fees for their services. 5
Pharmaceutical manufacturers also pay PBMs fees for services such as monitoring patient
adherence and administering rebate programs as the PBM adjudicates member claims. 6 Under Part
D regulations, bona fide service fees paid by manufacturers must be priced at fair-market value
commensurate with an arm’s-length transaction between unaffiliated parties. Part D plan sponsors
must report to CMS the value of fees in excess of fair-market value in the same way that they
report manufacturer rebates.7
Since the start of Part D, both POS prices for brand-name drugs and postsale rebates and fees have
grown rapidly, but rebates have increased at a faster rate. Between 2007 and 2017, spending for
brand-name drugs grew by an annual average of 10 percent, while postsale rebates and fees grew
by 19 percent annually. Consequently, the gap between brand prices charged at the pharmacy
(POS prices) and prices net of postsale rebates and fees has widened considerably. Using Part D
plan sponsors’ assumptions about rebates from their 2019 bids, the Medicare Trustees estimated
that postsale remuneration—consisting predominantly of manufacturers’ rebates—reduced POS
drug costs by 26 percent (averaged across all drugs, including those for which plans do not receive
any rebates).8 This is a significant increase from about 9.6 percent of POS spending in 2007. This
phenomenon is not limited to the Part D program. According to one estimate, in 2017, discounts,
2

Garthwaite, C., and F. Morton. 2017. Perverse market incentives encourage high prescription drug prices. ProMarket
blog. November 1. https://promarket.org/perverse-market-incentives-encourage-high-prescription-drug-prices/.
3
In one 2018 survey of employer and union health plans, 63 percent reported using pass-through pricing and 37
percent reported spread pricing. Larger employers were more likely to receive all rebates from their PBMs. Pharmacy
Benefit Management Institute. 2018. Trends in drug benefit design. Plano, TX: PBMI.
4
CVS Health. 2018. Current and new approaches to making drugs more affordable. August.
https://cvshealth.com/sites/default/files/cvs-health-current-and-new-approaches-to-making-drugs-more-affordable.pdf.
5
Payers pay PBMs administrative fees for claims processing and other services. Fein, A. 2017. The 2017 economic
report on U.S. pharmacies and pharmacy benefit managers. Philadelphia, PA: Pembroke Consulting.
6
According to manufacturers, these fees have increased rapidly. Pharmaceutical Research and Manufacturers of
America. 2017. Follow the dollar: Understanding how the pharmaceutical distribution and payment system shapes the
prices of brand medicines. Washington, DC: PhRMA.
7
CMS refers to rebates and fees paid by manufacturers to plan sponsors and postsale pharmacy fees as “direct and
indirect remuneration.”
8
Boards of Trustees, Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds. 2018.
2018 annual report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Insurance
Trust Funds. Washington, DC: Boards of Trustees.

 The Honorable Daniel R. Levinson
Inspector General
Page 4
rebates, and other price concessions reduced overall invoice (list price) spending for all U.S.
prescription drugs by 28 percent, from $453 billion to a net of $324 billion, a reduction of about
$130 billion.9 By comparison, the same researchers estimated that in 2007, the reduction was about
$50 billion, or roughly 17 percent of list prices.
We share the Inspector General’s concerns that the current use of rebate arrangements in the
prescription drug supply chain may create a barrier to lowering drug costs. At all points along the
supply chain, payments for distribution and administrative services are often based on a percentage
of the drugs’ prices. 10 As blockbuster drugs to treat widely prevalent diseases went off patent and
faced generic price competition, manufacturers turned their attention toward specialty drugs and
biologics for smaller patient populations. Meanwhile, participants in drug supply and distribution
channels grew to rely on price inflation for revenue growth. 11 Those factors, combined with the
increasing market concentration among participants in the drug supply and distribution channels,
have put upward pressure on both prices and rebates. Even employers and other payers have
become more reliant on pass-through rebate revenue from their PBMs.12
Implications of the gap between POS and net prices in Part D
The widening gap between POS and net prices has garnered attention because of its implications
for beneficiary cost sharing and Medicare program spending. In Part D, plan sponsors could use
manufacturer rebates to reduce the price of the prescription that generated the rebate at the POS.13
Under this approach, enrollees who use drugs for which a rebate is negotiated benefit because the
deductible and coinsurance amounts would be based on the discounted price. However, this
approach is not practical if the amount of rebate payment is determined retroactively based on
performance goals or the magnitude of price increases.
Instead, Part D plan sponsors overwhelmingly opt to use manufacturer rebates to lower plan
premiums because beneficiaries evaluate premiums closely when comparing plan options, and
9

IQVIA Institute for Human Data Science. 2018. Medicine use and spending in the U.S: A review of 2017 and outlook
to 2022. Parsippany, NJ: IQVIA.
10
Fein, A. 2018. Building a new drug wholesaler compensation model: What happens as brand inflation slows? Drug
Channels blog. July 24. https://www.drugchannels.net/2018/07/building-new-drug-wholesaler.html. Feldman, R.
2018. Perverse incentives: Why everyone prefers high drug prices—Except for those who pay the bills.
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3162432. Garthwaite, C., and F. Morton. 2017. Perverse market
incentives encourage high prescription drug prices. ProMarket blog. November 1. https://promarket.org/perversemarket-incentives-encourage-high-prescription-drug-prices/.
11
Fein, A. 2017. McKesson's profit shortfall: How wholesalers benefit from rising drug list prices. Drug Channels
blog. January 26. http://www.drugchannels.net/2017/12/the-cvs-aetna-deal-five-industry-and.html#more. Lopez, L.
2016. These companies you've never heard of are about to incite another massive drug price outrage. Business Insider,
September 12. Sell, D. 2015. Expect higher prices for generic drugs, says drug wholesaler. Philadelphia Inquirer,
September 17.
12
Fein, A. 2018. New disclosures show CVS and Express Scripts can survive in a world without rebates. Are plan
sponsors now the real barrier to disruption? Drug Channels blog. August 14.
https://www.drugchannels.net/2018/08/new-disclosures-show-cvs-and-express.html.
13
For 2019, one enhanced Part D plan, CVS Health’s SilverScript Allure, applies some manufacturer rebates to POS
prices at an enrollee premium of $80 per month. Nationwide, as of February 2019, out of total SilverScript enrollment
of about 6.1 million, Allure plans had about 24,000 enrollees.

 The Honorable Daniel R. Levinson
Inspector General
Page 5
premiums are the basis on which plans qualify as low-income subsidy (LIS) benchmark plans.
Using rebates to reduce plan premiums lowers Medicare program spending because Medicare
subsidies pay for a large portion of plan premiums for all enrollees. 14 However, under this
approach, because POS prices are not discounted, coinsurance amounts paid by the beneficiary are
higher. As a result, a higher proportion of enrollees reaches Part D’s OOP threshold—the point at
which Medicare's reinsurance pays for 80 percent of benefits. The approach also increases costs
for Medicare through higher low-income cost-sharing subsidies. Medicare pays for most of the
cost sharing on behalf of LIS enrollees. When plans set cost sharing as a percentage of POS prices,
Medicare’s low-income cost-sharing subsidy is higher than it would be on a net-of-rebate basis. 15
The Commission has previously discussed how Part D’s benefit design can create incentives for
plan sponsors to include certain high-cost drugs on their formulary over others, which can increase
beneficiary cost sharing and Medicare’s spending for the low-income cost-sharing subsidy and
reinsurance. 16 In addition, over recent years the amount of rebates and discounts that sponsors
received typically has exceeded the amount that sponsors projected in their bids. CMS contends
that, under Part D’s risk corridors, “any DIR (rebates and discounts) received that is above the
projected amount factored into a plan’s bid contributes primarily to plan profits, not lower
premiums.”17 Together, Part D’s unique benefit design and the current rebate approach provide a
financial advantage to plan sponsors. As a result, CMS is concerned that sponsors may have a
weak or no incentive to lower prices at the POS and may prefer high cost, high rebate drugs” when
available over alternative drugs that have lower net costs. Other analysts have suggested that
demand for rebates among plan sponsors has been a factor behind manufacturers’ decisions to
increase drug prices.18 PBMs counter that recent increases in rebates have not been correlated with
price growth.19
Uncertainty and the potential for negative financial consequences of the proposal
The Commission appreciates the motivation behind the OIG’s proposal to amend the safe harbor
regulation regarding rebates under the federal anti-kickback statute. For beneficiaries who use
highly rebated drugs, cost-sharing amounts that are based on a percentage of the POS price are too
high. The current gap between POS and net-of-rebate prices may lead to poor incentives in
formulary decision-making and may further exacerbate drug price inflation. Nevertheless, the
Commission recognizes that whether the proposed rule would lead to better incentives for
14

Medicare also retains a portion of aggregate rebates to offset a share of its payments for individual reinsurance.
LIS enrollees pay nominal cost sharing amounts—typically between $0 and $8 per prescription—that are set in law.
Medicare’s low-income cost-sharing subsidy pays for the difference between the cost-sharing requirements set by the
LIS enrollee’s plan and the nominal statutory copay amount.
16
Medicare Payment Advisory Commission. 2017. Report to the Congress: Medicare payment policy. Washington,
DC: MedPAC.
17
Centers for Medicare & Medicaid Services. 2017. Medicare program; contract year 2019 policy and technical changes to
the Medicare Advantage, Medicare cost plan, Medicare fee-for-service, the Medicare prescription drug benefit programs,
and the PACE program. Notice of proposed rulemaking. Federal Register 82, no. 227, pp. 56336–56527.
18
Anderson, G. and G. Bai. 2019. Reforming direct and indirect remuneration in Medicare Part D. Health Affairs blog.
February 19. https://www.healthaffairs.org/do/10.1377/hblog20190215.708286/full/.
19
PCMA. 2018. Reconsidering drug prices, rebates, and PBMs. Washington, DC: PCMA.
https://www.pcmanet.org/wp-content/uploads/2018/08/Reconsidering-Drug-Prices-Rebates-and-PBMs-08-09-18.pdf.
15

 The Honorable Daniel R. Levinson
Inspector General
Page 6
manufacturers and plan sponsors is uncertain, as suggested by the wide range of estimated effects
under different behavioral assumptions. In addition, some of the proposal’s effects, such as
potentially slowing growth in brand prices, may be realized over a longer time period and be less
apparent in the near term. Directionally, however, estimates that cover the initial 10 years of the
proposed changes suggest that the rule would have negative financial consequences for most
enrollees and for the Part D program, while reducing the share of benefit costs assumed by
pharmaceutical manufacturers.
Specific effects of the proposal would depend on behavioral responses to the change in policy
The estimated effects of the proposed rule vary widely, reflecting different assumptions and
significant uncertainty about the behavioral responses of plan sponsors, PBMs, and pharmaceutical
manufacturers. For example, rebate negotiations between plan sponsors or their PBMs and
manufacturers would undoubtedly change under the policy. However, the results of those
negotiations are difficult to predict. CMS’s Office of the Actuary assumed that because rebate
amounts would no longer be contingent on a drug’s attained market share, manufacturers would
offer lower rebates than they do today and instead retain some of those revenues. 20 Estimates by
other actuarial firms generally assumed that manufacturers would pass all of today’s rebates
through to beneficiaries at the point of sale. 21 This behavioral response would affect not only POS
prices, but also plan sponsors’ formulary decisions, which in turn could change the pattern of
drugs used by Part D enrollees.
Another key set of behavioral assumptions relates to whether manufacturers would lower list
prices for their drugs across all markets. The proposed rebate policy would apply only to Part D
plans and Medicaid managed care organizations, not to commercial health plans. Because any
change in a drug’s list price (wholesale acquisition cost) would apply to the entire U.S. market,
manufacturers that were willing to lower their prices would need to bear in mind the revenue they
would lose in commercial sales. Strategic responses would likely vary across manufacturers and
might even differ among their products. For example, a manufacturer might choose to launch an
authorized generic to allow for differing list prices and rebate strategies for the same drug in
different markets.22 Eliminating rebates could reduce the financial benefits of higher prices of both
existing and new products, but the magnitude of effects on price levels or growth rates would
likely vary across drugs.
Instead of lowering list prices, manufacturers might prefer a strategy of keeping prices at current
levels and negotiating individualized discounts with payers in return for formulary placement.
20

Centers for Medicare & Medicaid Services, Office of the Actuary. 2018. Memo on the effects of proposed safe
harbor regulation. August 30. In addition, if a drug manufacturer passed along current rebates and competitors were
able to observe the discount amount because it was provided at the POS, all manufacturers of competing therapies
might begin to offer similar (and over time, potentially lower) discounts.
21
Klaisner, J., Holcomb, K., and Filipek, T. 2019. Impact of potential changes to the treatment of manufacturer
rebates. Brookfield, WI: Milliman. Lambert, J., Courtney, T., and McStanley, D. 2018. Estimates of the impact on
beneficiaries, CMS, and drug manufacturers in CY2020 of eliminating rebates for reduced list prices at point-of-sale
for the Part D program. Tampa, FL: Wakely.
22
http://www.milliman.com/insight/2019/Changing-the-rebate-game-A-primer-on-the-HHS-proposed-rule-to-shiftdrug-rebates-to-POS/.

 The Honorable Daniel R. Levinson
Inspector General
Page 7
Beneficiaries enrolled in plans that charge coinsurance would pay cost sharing on the discounted
price. Lower cost sharing, in turn, could lead beneficiaries to fill more prescriptions.
Individualized discounts would be consistent with the current approach of price discrimination,
which helps manufacturers to expand sales and profits. However, plan sponsors might not prefer
that same strategy. Part D enrollees have the opportunity to switch plans annually, and
beneficiaries who use high-cost, high-rebate drugs could seek out plans that negotiate the best
discounts. As a result, applying discounts to POS prices may result in adverse selection for the
plan, and plan sponsors may not have strong incentives to drive a hard bargain with manufacturers
for individualized discounts.23 Instead, plan sponsors would likely prefer that manufacturers lower
list prices, which would also benefit commercial clients.
It is also unclear how PBMs would respond to the proposed policy of moving to flat fees for
services provided to manufacturers. Today, most PBMs are integrated vertically with health plans,
mail-order pharmacies, and specialty pharmacies. If PBMs perceive that fixed fees would reduce
their revenues relative to the current approach, they may seek to expand revenues in ways not
subject to the proposal. For example, PBMs’ mail-order or specialty pharmacies could negotiate
for larger rebates, postsale discounts, and fees from manufacturers because the current safe harbor
would continue to protect manufacturer price concessions to pharmacies. CMS and plan sponsors
that are not vertically integrated with mail-order or specialty pharmacies typically do not observe
those types of discounts even though they affect costs for beneficiaries and the Medicare program.
Potential negative financial consequences for most Part D enrollees and the Medicare program
Despite the uncertainty in behavioral responses of manufacturers, plan sponsors, and PBMs, most
of the estimated 10-year effects provided with the OIG’s proposal were directionally consistent.
They generally suggest that most beneficiaries would experience higher OOP costs due to higher
premiums and the Medicare program and taxpayers would likely face higher program spending,
while pharmaceutical manufacturers would pay lower amounts in coverage-gap discounts.
Most beneficiaries would face increased out-of-pocket costs
Part D plan sponsors generally use rebates to offset benefit costs (i.e., lower premiums for all plan
enrollees) rather than to lower POS prices and cost sharing. A policy that shifts some or all rebates
to lower prices at the POS would decrease cost-sharing liability for some enrollees (i.e., those who
use medications with POS rebates or discounts), but would increase premiums for all enrollees.
Even under the most optimistic scenario where the current level of manufacturer rebates and
discounts are fully reflected at the POS, only beneficiaries who use branded prescriptions with
POS discounts would see a reduction in their cost-sharing liability. (However, even those
beneficiaries benefiting from POS rebates would still have no limit on what they must pay OOP.)
Further, only a subset of those beneficiaries is likely to have reductions in cost sharing that exceed

23

Seeking Alpha. 2019. Humana’s CEO Bruce Broussard on Q4 2018 results—earnings call transcript. February 6.

 The Honorable Daniel R. Levinson
Inspector General
Page 8
the premium increase. 24 For most beneficiaries, the policy would increase their total OOP liability
through higher premiums.
Medicare Part D would likely incur higher program spending
Under Part D, Medicare subsidizes about 75 percent of the cost of providing the basic benefit. That
subsidy amount is based on the average of bids submitted by plan sponsors that reflect their
estimated revenue requirements for providing the benefit, net of expected rebates and discounts.
Medicare’s subsidy to plans takes two forms: capitated direct-subsidy payments and reinsurance
on 80 percent of an individual enrollee’s spending in Part D’s catastrophic phase.
By requiring rebates and discounts to be reflected as lower POS prices, the proposal would likely
increase Medicare’s subsidy payments to plan sponsors through higher premiums. Among the
three sets of estimates of the proposal’s effects, each one found that as premiums increased, so did
Medicare’s direct subsidy payments and low-income premium subsidies. At the same time, lower
POS prices means that fewer enrollees would reach the catastrophic phase, thereby reducing Part
D’s reinsurance payments. Lower POS prices would also reduce Medicare’s low-income cost
sharing subsidy payments. On net, however, two of the three sets of estimates prepared for OIG
found that Medicare program spending would increase. 25 The third set of estimates offered a range
of outcomes, from program savings (under the assumption that plans tightened formularies and
negotiated larger price concessions from manufacturers) to higher program costs (under the
assumption that manufacturers would not lower prices by the full magnitude of current rebates).
Very few estimates assumed potential behavioral changes, such as beneficiaries filling more
prescriptions for brand-name drugs if their cost sharing was lowered because POS prices reflected
the rebate amounts. Some patients might become more adherent to their medication regime
because of lower cost sharing, and other beneficiaries might newly decide that they are able to
afford the prescribed drug at the lower amount. For some enrollees, that behavioral response may
lead to improved clinical outcomes. At the same time, it would also tend to increase Medicare
program spending.
Pharmaceutical manufacturers would assume a smaller share of benefit costs
Manufacturers of brand-name drugs and biological products are required to provide POS discounts
equal to 70 percent of negotiated prices for all brand prescriptions filled by non-LIS beneficiaries
in the coverage-gap phase (known as the coverage-gap discount). Currently, CMS’s definition of
negotiated prices includes all price concessions from manufacturers and pharmacies to plan
sponsors except those amounts that cannot reasonably be determined at the POS. Because
manufacturer rebates and discounts (other than the coverage-gap discount) are typically paid after
the POS transactions, they are not included in negotiated prices. To the extent that manufacturers
24

Wakely estimated that 30 percent of non-LIS enrollees would have reductions in cost sharing that would more than
offset the increase in premiums. Lambert, J., Courtney, T., and McStanley, D. 2018. Estimates of the impact on
beneficiaries, CMS, and drug manufacturers in CY2020 of eliminating rebates for reduced list prices at point-of-sale
for the Part D program. Tampa, FL: Wakely.
25
Wakely estimated that Medicare program costs in 2020 would increase by 3 percent. CMS’s Office of the Actuary
estimates that between 2020 and 2029, Medicare program spending for Part D would increase by $196 billion.

 The Honorable Daniel R. Levinson
Inspector General
Page 9
and PBMs respond to OIG’s proposal by negotiating lower POS prices, this would reduce
negotiated prices and, in a corresponding manner, lower the amount manufacturers must pay in
coverage-gap discounts. The reduction in coverage-gap discount would likely increase enrollee
premiums and Medicare’s program spending. 26
Effects on other federal programs and other parts of Medicare
In the proposal, OIG notes potential effects on other federal programs that rely on market prices to
determine payment rates or mandated rebate amounts. For example, under Part B, Medicare pays
for certain drugs based on average sales price (ASP), which reflects the postsale rebates and
discounts that most purchasers receive. If the proposed policy affected the broader pharmaceutical
supply chain and pricing, payments for pharmaceutical products under Part B and other federal
programs that use market prices could increase or decrease.
Alternative approaches for better aligning stakeholder incentives in Part D
The Commission shares the Inspector General’s concerns and agrees that a change is needed to
ensure Part D sponsors face incentives that align with the program and its beneficiaries. We
previously discussed how Part D’s benefit design can create incentives for plan sponsors to include
certain high-cost, high-rebate drugs on their formulary over others, which can increase beneficiary
cost sharing and Medicare spending for reinsurance. 27 At the same time, manufacturers may find
that, for some products, higher prices allow them to offer larger rebates than their competitors and
gain more market share via favorable placements on plan formularies. In this sense, Part D’s
benefit design may contribute to the inflationary trend in pharmaceutical pricing.
Growth in list prices, combined with rising rebates, has contributed to a relatively slow growth in
premiums and a rapid growth in reinsurance payments. Premiums and fixed-dollar copayments are
lower for all enrollees when plan sponsors offset their benefit costs with postsale rebates and
discounts. However, enrollees who pay coinsurance for their prescriptions do not see any reduction
to their cost sharing because coinsurance is based on the price before postsale price concessions
are applied. Because Part D’s OOP threshold is based on the higher (gross) price, the trend
contributes to more beneficiaries exceeding that OOP threshold and increases Medicare’s
payments for reinsurance.
In 2016, the Commission recommended an integrated set of changes to Part D that would phase in
a reduction of Medicare’s reinsurance from 80 percent to 20 percent while simultaneously

26

Lower coverage-gap discount payments would be expected to increase plan costs through a reduction in
manufacturer contributions toward Part D benefit costs even if the net prices are same under the proposed policy as
under current law (if the POS discounts are less than the amounts plan sponsors currently receive in postsale rebates
and discounts, the benefit costs would rise further). The result is high bids, which translate into higher government
subsidies to plan sponsors and higher beneficiary premiums.
27
Medicare Payment Advisory Commission. 2017. Report to the Congress: Medicare payment policy. Washington,
DC: MedPAC.

 The Honorable Daniel R. Levinson
Inspector General
Page 10
increasing capitated payments to plans, among other changes. 28 Those recommendations could
better align plan sponsors’ financial incentives to include lower-priced drugs on their formularies.
Beneficiaries would also benefit from lower cost sharing if they select those lower-priced drugs.
The Commission’s 2016 package of recommendations, however, relied on indirect effects to
address the pricing incentives of pharmaceutical manufacturers. Because plan sponsors would be
responsible for a greater share of insurance risk in the catastrophic phase, the Commission expects
the recommendations would reduce the financial benefits of including high-price, high-rebate
products on their formularies. To the extent that plan sponsors move away from preferring those
products, there may be an indirect effect on manufacturers’ pricing strategies. Those indirect
effects, however, may be limited and would likely vary depending, for example, on the availability
of therapeutic competition and the size of the Part D market relative to total U.S. sales for the
relevant products.
While Medicare’s influence on drug pricing is indirect, its large market share (about one-third of
U.S. retail pharmaceutical sales) results in Medicare’s payment policies having a significant
financial effect on the U.S. health care market, including pharmaceutical manufacturers. 29 For
example, the amount manufacturers must pay in coverage-gap discounts would be a relatively
large share for products with low POS prices but would be a relatively small share for products
with high POS prices. That situation may factor into manufacturers’ pricing strategies, such as
higher price increases or launch prices that already account for the amount they are likely to owe
in coverage-gap discount.
One potential policy option that would offer better pricing incentives would be to require
manufacturers to provide discounts in the catastrophic phase of the benefit rather than during the
coverage-gap phase.30 Under that approach, manufacturers of high-priced products would pay a
larger discount, on average, than manufacturers of lower-priced products. Because the size of
discount would increase proportionately with price, such an approach may make price increases
less attractive to manufacturers. To ensure Medicare’s program spending for Part D does not
increase, policymakers could choose the rate of manufacturer discount in the catastrophic phase of
the benefit that would provide at least as much price discount (in aggregate) as under the current
coverage-gap discount policy.
Conclusion
The Commission values the ongoing cooperation and collaboration between OIG and our staff on
technical policy issues. We look forward to continuing this productive relationship. If you have

28

Medicare Payment Advisory Commission. 2016. Report to the Congress: Medicare and the health care delivery
system. Washington, DC: MedPAC.
29
Kaiser Family Foundation analysis of CMS National Health Expenditure Data. 2019.
https://www.kff.org/infographic/10-essential-facts-about-medicare-and-prescription-drug-spending/.
30
Hayes, T. O. 2018. Redesigning Medicare Part D to realign incentives. Washington, DC: American Action Forum.
https://www.americanactionforum.org/research/redesigning-medicare-part-d-realign-incentives-1/.

 The Honorable Daniel R. Levinson
Inspector General
Page 11
any questions, or require clarification of our comments, please feel free to contact James E.
Mathews, the Commission’s Executive Director, at 202-220-3700.
Sincerely,

Francis J. Crosson, M.D.
Chairman