Medicaid gets much deeper discounts on many prescription drugs than Medicare, in part because Medicaid discounts are set by law whereas Medicare prices are negotiated by private insurers and drug companies, federal investigators said Monday in a new report.
The report, from the inspector general of the Department of Health and Human Services, could be used by lawmakers trying to cut drug prices as Congress looks for ways to rein in the cost of Medicare under the new deficit-reduction law.
Under existing law, the Congressional Budget Office estimates that the cost of Medicare’s outpatient drug benefit will increase an average of nearly 10 percent a year, to $175 billion in 2021, from $68 billion this year.
Medicaid and Medicare receive discounts in the form of rebates, which are paid by drug manufacturers when
their products are dispensed to people enrolled in the programs.
The inspector general, Daniel R. Levinson, found that rebates reduced spending on 100 widely used brand name drugs by 19 percent in Medicare and by 45 percent in Medicaid. After taking account of the rebates, Mr. Levinson said, Medicaid paid significantly less than Medicare for the same drugs.
Federal law specifies how the discount, or rebate, is calculated under Medicaid, the program for low-income people. The minimum rebate for a brand-name drug was increased last year to 23 percent of the average price that manufacturers receive for sales of the product to retail pharmacies.
Drug companies must pay additional rebates to Medicaid if a drug’s price rises faster than general inflation, measured by the Consumer Price Index. The inspector general said these added rebates accounted for slightly more than half of all rebates paid to Medicaid on the top 100 drugs. Prices for many of these drugs have been rising at a brisk pace.
“The inflation-based additional rebate is the primary reason Medicaid rebates are substantially higher” than Medicare rebates, Mr. Levinson said.
“Manufacturers for virtually all brand name drugs under review paid inflation-based rebates” to Medicaid because their prices rose faster than inflation, the report said.
For 68 of the 100 brand-name drugs examined in the study, the Medicaid rebate was at least twice as large as the rebate paid to Medicare.
About 30 million older Americans and people with disabilities receive drug coverage through Part D of Medicare. More than 50 million low-income people have drug coverage through Medicaid.
When Congress added a prescription drug benefit to Medicare in 2003, it prohibited the government from negotiating drug prices on behalf of Medicare beneficiaries and stipulated that outpatient drug coverage should be provided entirely through private insurers like UnitedHealth and Humana, under contract with Medicare.
Insurers have aggressively negotiated with pharmaceutical companies, so Medicare’s prescription drug program has cost the government less than originally predicted. But the private insurers have not obtained discounts or rebates as large as those secured by Medicaid, the inspector general said.
The study comparing Medicare and Medicaid was required by the new health care law.
Drug companies oppose the type of discounts required by Medicaid, seeing them as government price controls. Drug makers say they prefer Medicare’s market-oriented approach, in which discounts are negotiated by drug plans and manufacturers.
Two Democrats, Representative Henry A. Waxman of California and Senator John D. Rockefeller IV of West Virginia, recently introduced bills that would require drug manufacturers to pay the higher Medicaid rebates for drugs provided to Medicare beneficiaries who are also eligible for Medicaid. President Obama’s deficit-reduction commission has endorsed the proposal, saying it could save $49 billion over 10 years.
By Robert Pear
The New York Times