GAO Report on Medicare Part D Finds PBMs Earned Little Revenue From Spread Pricing

The Government Accountability Office recently released a report about the role of pharmacy benefit managers (PBMs) in Medicare Part D.

Senator Susan Collins, R-Maine, chair of the Special Committee on Aging, and Representative Richard Neal, D-Massachusetts, chair of the Ways and Means Committee in the House of Representatives, requested the report. With rising concern over rising drug prices, policymakers have sought a better understanding of PBMs' roles in the drug supply chain, as well as plans' and PBMs' efforts to manage Part D drug spending and use.

The report discussed the extent to which Part D plan sponsors use PBMs, trends in rebates and other price concessions obtained by both PBMs and plan sponsors for Part D drugs, and how PBMs earn revenue for services provided to Part D plans.

The GAO analyzed CMS’ data on Part D plan sponsors' use of PBMs in 2016, as well as CMS drug expenditure, pricing, and rebate and other price concession data for all Part D drugs from 2014 through 2016. To create the report, the GAO reviewed service agreements between Part D plan sponsors and PBMs that were approved by CMS from January 2016 through May 2018 and had the highest enrollment as of June 2018. In addition, the GAO spoke with CMS officials and 38 stakeholder groups including PBMs, Part D plan sponsors, pharmacy representatives, and drug manufacturers.

Total Medicare Part D expenditures exceeded $100 billion in 2016.

PBMs primarily earned Part D revenue via 3 ways:

• Through a volume-based fee paid by plan sponsors based on PBM-processed claims
• Through a per-member, per-month fee paid by plan sponsors
• Or through a combination of the 2

PBMs also earned revenue from the rebates they negotiated with manufacturers for Part D drugs, which accounted for $18 billion of the $26.7 billion in rebates in 2016. But PBMs retained less than 1% of these rebates, passing the rest to plan sponsors, which may have used the rebates to offset the growth in drug costs and control premiums.

Interestingly, the GAO report showed that for Part D plans, PBMs earned little revenue from spread pricing, which is a tactic where PBMs keep the difference between the amount the PBM paid the pharmacy for a drug and the amount the PBM charged the plan for the drug. PBMs earned about $300,000 from spread pricing in 2016, according to CMS rebate and other price concession data, and none in either 2014 or 2015.

Officials from 3 PBMs said that their industry generally earns more from spread pricing and rebate retention in commercial plans than they do from Part D; some officials said CMS reporting requirements have removed much of the incentive in Part D for PBMs to earn revenue from spread pricing because of the complexity of the requirements and the criticism from healthcare providers when those amounts are publicly reported.

The GAO found that Medicare Part D plan sponsors used PBMs to provide 74% of drug benefit management services and performed the remaining 26% of services themselves in 2016. A PBM was used to provide 1 or more of the 10 key drug benefit management services under nearly all of the 624 Part D plan sponsor contracts.

Rebates and other price concessions grew faster than Part D expenditures from 2014 through 2016. Specifically, gross expenditures (the amount paid to pharmacies by plan sponsors, or by the PBM on the sponsor's behalf, and by the beneficiary) rose 20%, to $145.1 billion.

During this period, rebates and other price concessions increased 66%, to $29 billion—20% of 2016 gross expenditures. Consequently, net expenditures increased 13% to just over $116 billion.

By drug class, expenditures and rebates and other price concessions varied for the 444 highest-expenditure, highest-utilization drugs in 2016. Among those with 10 or more drugs in their class, gross expenditures ranged from $2.9 billion to $21.2 billion, and rebates and other price concessions ranged from $170 million to $8.7 billion.

Four classes—endocrine metabolic agents, anti-infective agents, respiratory agents, and central nervous system agents—accounted for 54% of the gross Part D expenditures, and 62% of rebates and other price concessions for the 444 highest-expenditure, highest-utilization drugs. When accounting for rebates and other price concessions, these drugs accounted for 51% of net Part D expenditures.