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Reforming Rebate Contracting will Improve Drug Affordability

The Department of Health and Human Services (HHS) finalized a regulation on November 20, 2020 that removed the safe harbor protections for rebates on prescription drugs paid to pharmacy benefit managers (PBMs) and Part D plans. This analysis evaluates the expected impact from this regulation on Medicare premiums and patient out-of-pocket (OOP) costs. Based on the data from the California Department of Managed Health Care (DMHC), the loss of manufacturer drug rebates would cause the average insurance premiums to increase by $40.96 annually. Across the 12.9 million recipients of the Medicare low-income subsidy, this implies an increase in expenditures of $528.4 million. If OOP costs were to fall by the full share of the concessions paid (as expected from this reform), then patients with high OOP costs ($3,214 annually according to the Kaiser Family Foundation), could expect to save $1,451 annually. These policy trade-offs do not account for the expected improvement in patients’ adherence to their medications from lowering their OOP costs. Relying on proxies for these relationships, per patient total health care savings could range between $381 and $1,522 depending upon the actual improvement in medication adherence observed. Across the more than 1 million Medicare Part D patients with high OOP costs, total healthcare expenditures for Medicare could decline between $386.9 million and $1.5 billion. Based on the results of the study, the finalized regulation should meaningfully address the drug affordability problem while imposing only minimal increases in individuals’ insurance premiums and total Medicare expenditures.


Wayne Winegarden and Robert Popovian

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