Private Medicare Drug Plans: Seniors and Taxpayers Hurt by High Expenses, Low Rebates

With only two exceptions, the Part D insurers have established drug pricing formulas that pay pharmacies the manufacturers’ published “Average Wholesale Prices,” which are the manufacturers’ list prices, minus a fixed percentage (on average 15%), plus a small dispensing fee (on average $2.10 per prescription). These pricing formulas result in pharmacy prices that are about the same as the prices charged by discount pharmacies like Costco, Wal-Mart, or Drugstore.com.

One effect of these pricing formulas is that they leave beneficiaries and taxpayers vulnerable to increases in drug manufacturer list prices, which are passed on as price increases at the pharmacy counter. Since the Part D program went into effect in January 2006, the average list price for the 25 most popular drugs used by Part D beneficiaries has increased by 8.9%, almost twice as fast as the overall inflation rate. Under the pricing formulas negotiated by the Part D insurers, beneficiaries in coverage gaps pay these price increases out-of-pocket. Beneficiaries enrolled in plans that set copay levels as a percentage of the pharmacy price also pay higher copays. Taxpayers are vulnerable to the increases in list prices because the Medicare program pays the full cost of drugs used by low-income Part D beneficiaries and 80% of the costs of drugs used by beneficiaries who receive catastrophic coverage.