Jan 22, 2020

How rebates cut — and distort — government drug spending

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Data: Centers for Medicare & Medicaid Services; MACPAC; Kaiser Family Foundation; Chart: Naema Ahmed/Axios

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.

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