How rebates cut — and distort — government drug spending
State and federal spending on prescription drugs is dramatically outpacing inflation, even after accounting for rebates, according to a new analysis of federal data.
The big picture: Rebates lower drug spending, as their proponents argue. But they also reinforce a system that's incredibly complex and costly — especially for people who take a lot of medications and have to pay sizable amounts out of pocket.
By the numbers:
- Gross spending on prescription drugs in federal and state insurance programs totaled $268 billion in 2018.
- Net spending, after accounting for the rebates that are negotiated between drug companies and pharmacy benefit managers, was about one-third lower, at roughly $189 billion.
- Gross spending for Medicare and Medicaid increased an average of 11.4% annually from 2014 to 2018, while net spending rose by an average of 7.2% per year.
That means even when accounting for rebates, drug spending has been growing at a relatively high rate.
Between the lines: Pharmaceutical companies and PBMs have created a Rube Goldberg system in which each side benefits.
- Pharmaceutical companies raise their list prices and justify those hikes as ways to offset the bigger rebates they have to pay out.
- PBMs announce bigger rebates, all while getting large taxpayer subsidies to guard against severe losses.
- Both, therefore, benefit from higher drug prices.
What they're saying: If this system of rebates and federal reinsurance existed in auto insurance, insurers would be seeking "higher-risk drivers, with the hopes that more fender-benders can yield" big returns, the founders of drug research firm 46brooklyn said in a new analysis.
The bottom line: Taxpayers generally continue to pay more for prescription drugs, and sick patients are most exposed to rising prices.
How we did this analysis: The 46brooklyn analysis inspired us to go deeper.
- Yearly gross spending figures come from the Centers for Medicare & Medicaid Services' updated data.
- Net spending figures for Medicare Part D, which covers drugs people get from a pharmacy, are based on rebate percentages provided by the Medicare Trustees report.
- Net spending for Medicaid is based on rebate estimates from the Kaiser Family Foundation and the Medicaid and CHIP Payment and Access Commission.
- Spending on Medicare Part B, which covers infusion drugs and others that need to be administered in hospitals or doctors' offices, already includes rebates.