Tuesday, July 22, 2014

Who Pays Less for Drugs: Medicaid, DOD, or Medicare Part D? The Answer May Surprise You

Hey there, pharmacy reimbursement nerds! The Government Accountability Office (GAO) has a fun new report for you: Comparison of DOD, Medicaid, and Medicare Part D Retail Reimbursement Prices.

The report documents the interplay between a retail pharmacy’s prescription revenues, the consumer’s out-of-pocket expenses, and the net (post-rebate) drug price paid by each program. It also has a good background on how each federal payer operates.

Bottom line: While Medicaid had the biggest rebates, Medicare Part D had the lowest average prescription costs. Although the GAO doesn’t explain this discrepancy, my computations below show that Part D had higher generic dispensing rates than the other government payers. An argument for the triumph of formulary management over federal price controls?

The report’s Figure 2 highlights the main findings. Note that Gross Price represents the total per-unit payment to the pharmacy. See the original report for the figure’s footnotes.

[Click to Enlarge]

  • Unsurprisingly, the GAO found that Medicaid had the lowest net drug prices, because of the program’s federally-mandated rebates. (These are the dark blue bars in the chart above.) In the Medicaid program, 62% ($2.54/$4.11) of brand-name retail prescription revenues were rebated to state Medicaid agencies. In contrast, Part D rebates averaged only 19% of brand-name prescription revenues.
  • Medicare Part D had the highest brand-name pharmacy reimbursement rates, at $4.18. It also had the highest out-of-pocket share, at 17% (=$0.73/$4.18) for brand-name prescriptions and 21% (=$0.08/$0.38) for generic prescriptions. For a 30-day prescription, these amounts translated into per-prescription copayments of $21.40 (brand-name) and $2.40 (generic). For Medicaid, beneficiary share of prescription costs were nominal. For DOD, beneficiaries paid only 6% of brand-name prescriptions and 14% of generic prescriptions.
  • Despite the rebate and pharmacy reimbursement results, Medicare Part D had the lowest average prescription cost ($1.23/unit). On pages 15-16, the GAO ruminates on multiple possible explanations for the results. Oddly, it omits any consideration of the generic dispensing rate (GDR).
  • Using the data in Figure 2 above, I computed the following implied GDRs:
      Department of Defense (DOD) = 66.6%
      Medicaid = 73.3%
      Medicare Part D = 77.6%
    As a result of the higher GDR, the average Part D prescription was 6% cheaper than a Medicaid prescription and 24% cheaper than a DOD prescription.
So, what's going on here?

  • Part D plans' formularies used out-of-pocket payments to encouraged lower-tier generic drug usage.
  • The GAO study was based on 2010 data, so seniors wanted to keep their total drug costs below the lower end of the donut hole.

As a result, seniors got the biggest bang for their buck by accepting generic substitution and paying attention to total costs. (Unlike today, preferred pharmacy networks were not a major feature of 2010’s Part D prescription drug plans.)

Hey, whaddaya know? People respond to incentives.

P.S. I didn’t bore you with the methodology. Enjoy the wonky details on pages 17-27. Note that the data sample included the same products—33 brand-name drugs and 45 generic drugs. Yes, I realize that utilization rates differed by payer.


  1. I don't think it is as simple as "a triumph of formulary management over federal price controls." First of all, most Medicaid programs do utilize formulary management, at least to some extent, either in their fee-for-service Preferred Drug Lists or their managed care carve-in contracts. More importantly, however, is adverse selection in Medicaid. You are comparing apples and oranges if you compare the Medicare D population with the Medicaid population. All seniors qualify for Medicare Part D -- regardless of income or health status. To qualify for Medicaid, you must either be low income, disabled, or both. As a result, the Medicaid population contains a disproportionally higher percent of individuals who need expensive brand-name products. Think treatments for hemophilia, cystic fibrosis, chronic and persistent mental health issues such as schizophrenia and bipolar, HIV/AIDS, and genetic diseases such as Hunter Syndrome and Gaucher's disease for which there were no treatments when today's Seniors were young children.

    It will be interesting to see what next year looks like and how the new treatments for Hepatitis C affect both Medicare D and Medicaid.

  2. While you are generally, your critique does not apply to this GAO report. The study's drug sample used the same 78 drugs for all three payers. (See pages 21-23.) There were no specialty drugs in the sample.

  3. In Iowa, they mandate a number of brand name drugs even though generics are available. This is true for Dexedrine, Adderal XR, Ritalin and many more.

    Toni Sumpter, Pharm.D.
    Sumpter Pharmacy and Wellness

  4. Good point -- I should read the fine print! However, after reading the fine print, I still think the analysis is flawed. For one thing, state-negotiated Medicaid supplemental rebates (which can be significant for branded products) were not included in the Medicaid pricing. One of the footnotes notes that supplemental rebates are in the neighborhood of 4% of total Medicaid prescription costs. The 4% are concentrated in the branded products though, so the exclusion of them could be skewing the data -- especially if some of the 33 selected brands are heavily rebated. Also, the utilization mix was chosen based on Medicare and DOD data only and might not be reflective of top Medicaid utilization.

  5. IMHO, those limitations are not fatal flaws.

    1. Including supplemental rebate info would not change the conclusions. It would only further reduce Medicaid's net price. There would be no impact on gross price.

    2. Since the sample included the same drugs for all payers, it is an apples-to-apples comparison. You are correct that there is an uncontrolled utilization mix effect. If I was a peer reviewer, I would ask the authors to re-compute the gross price, weighted by drug utilization. Given the drug list, I suspect there is little difference between the unweighted and weighted gross prices.

    There is no such thing as a perfect study. IMHO, this study is reasonably well done and has interesting conclusions.

  6. Toni, You have to understand that branded drugs are subject not only to a mandated percentage rebate but also to a CPI penalty that is added on to the mandated rebate when their cost escalates faster than inflation. Generics are not subject to this same CPI penalty. This results in branded drugs often being incredibly inexpensive to Medicaid programs, especially when a generic first comes out. While it appears that Medicaid isn't buying the cheapest drug in the marketplace, in reality they are and many states spend a good deal of time reviewing that brand/generic differential to take maximum advantage of it. Managing to the lowest net cost as it were.

  7. As a taxpayer, the net price is what matters, so from what I can tell, Medicaid gets the most bang for my buck. Part D has much more flexibility for payment rates to pharmacies as Medicaid and DOD are setting pricing in a legislative fishbowl, and the nominal copay requirements for Medicaid is fully irrelevant in driving utilization. The drugs may be apples to apples, but the different abilities of the three drug benefits for pricing, copays, formulary, etc. means that the plans are apples to oranges to bananas.

    Again, as a taxpayer, the net price matters. Give me the properly managed Medicaid program with the government mandatory rebates instead of the Part D benefit with the extra layer of profit (not accounted for in this study) for the payments to the PBMs to run the benefit.