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UWSOP faculty co-author study on how Medicare is overpaying for generic drugs

Disturbing financial practice by Medicare Part D sponsors revealed in University of Washington study of data from the Centers for Medicaid and Medicare Services

Medicare is the single largest provider of health insurance in the United States, serving 63.8 million senior citizens as of 2022. Three-quarters of these recipients are enrolled in optional Medicare Part D plans, which provide outpatient prescription drug coverage to seniors through private insurance companies. In 2022, Medicare paid more than $160 Billion for prescription drugs, making it the single largest payer of pharmaceuticals in the US. While Medicare is meant to keep healthcare affordable for seniors, millions of Americans still face steep costs for prescription medications. Researchers from the CHOICE Institute, University of Washington, the University of California San Diego and West Health Policy Center have now explained part of the problem.

The researchers found evidence that the private insurers that sponsor Medicare Part D (through their Pharmacy Benefit Managers [PBMs]) are inflating the costs of some generic drugs by overpaying pharmacies. The findings are published in the December 5, 2023 issue of the Journal of the American Medical Association. The researchers gathered and analyzed data from the Centers for Medicare and Medicaid Services (CMS), focusing on spending and reimbursement data for the 50 generic drugs that Medicare Part D spent the most on in 2021. They found that some Medicare Part D sponsors were reimbursing at much higher rates than what pharmacies spent to acquire the drugs.

To fill prescriptions, pharmacies purchase drugs wholesale and are reimbursed by insurers. In order to be reimbursed, pharmacies must adhere to contractual obligations that allow insurers to take back money in certain circumstances, such as when the reimbursement to the pharmacy is higher than a certain threshold, or if the pharmacy’s cost of acquisition is very low. These ‘clawbacks’ by Part D Plans can be financially devastating to a pharmacy.

“It doesn’t make sense that insurers would overpay for drugs, then use claw backs to retroactively adjust payments after the patient has paid their co-payment,” said co-author Sean D. Sullivan, PhD, professor of pharmacy at the University of Washington. “This practice is opaque and ultimately harms patients and pharmacies.”

That harm also extends to relationships between pharmacists and their patients, according to UW Department of Pharmacy Associate Professor and Interim Chair Ryan N. Hansen, PharmD, PhD.

“Not only have PBM business practices bankrupted community pharmacies, they damage the important relationships between pharmacists and their patients by creating unaffordable out-of-pocket costs, resulting in difficult decisions to forego important treatments at the pharmacy counter,” said Hansen.

Generic over-reimbursement is one of the areas targeted for reform by the United States Senate, after anecdotal evidence submitted earlier this year by the non-profit manufacturer CivicaRx raised concerns about Part D sponsors potentially over-reimbursing pharmacies for abiraterone, a cancer drug. The concern: that patients are ultimately impacted by these reimbursement practices because of how out-of-pocket costs (e.g., co-payments and deductibles) are calculated.

“For instance, if a patient pays 30% as a co-payment for a drug, that 30% would be applied by the PBM to the inflated price, not the price the pharmacy paid or the price the PBM pays the pharmacy, which means higher out-of-pocket costs for seniors,” said corresponding author Inmaculada Hernandez, PharmD, PhD, professor at UC San Diego Skaggs School of Pharmacy and Pharmaceutical Science. “This is the first study to investigate whether these PBM practices actually take place in the Medicare Part D program,” added Hernandez.

“The results are alarming,” said Hernandez. “We are talking about significant markups in some cases.”

In one of the most dramatic examples, the researchers found that insurers were reimbursing pharmacies an average of $126 per tablet for a cancer drug that cost $4.20 per tablet to the pharmacy. This corresponds to an average markup of 3,000%, or $3,600 per 30-day prescription. Some insurers paid even more.

“Seniors are clearly paying more for their medications as a result of these markups,” said Hernandez. “More research is needed to confirm the scope of these practices, but the evidence we present in the paper is concerning.”

Full link to study:

Co-authors include: Nico Gabriel at UC San Diego, Anna Kaltenboeck at ATI Advisory, and Cristina Boccuti at West Health Policy Center.

This study was funded by West Health Policy Center.


Media Contact: Scott Braswell, +1-423-741-5697