Association for Public Policy Analysis & Management

In the Medicare Part D prescription drug benefit, beneficiaries with very high drug costs in the year enter catastrophic coverage, which limits the liability for private Part D insurers and for beneficiaries. For drug spending exceeding the catastrophic coverage threshold ($8,140 in 2018), 5% is paid by the beneficiary and only 15% by the insurer. The Medicare program is responsible for the remaining 80%. This arrangement suggests that for very high-cost drugs that are likely to land a beneficiary in catastrophic coverage, there is a reduced incentive for insurers to negotiate large discounts (i.e., “rebates”) off the list price of drugs since the insurer will only pay a small portion of the cost. The adverse impact of this cost-sharing policy has become more important over time as the use of high-price specialty drugs has grown and the amount of Part D expenditures attributed to catastrophic coverage spending has increased.

This study seeks to determine if rebates are indeed lower for high-price drugs than other drugs, especially for those drugs used most heavily by the Medicare population. I develop a drug-year-level measure of drug rebates by comparing the annual U.S. invoice spending on drugs with the net U.S. revenues reported by drug manufacturers in filings with the Securities and Exchange Commission filings and other publicly available data. Controlling for observable covariates, I regress this rebate percentage on an interaction between an indicator variable for a drug being a high-price drug (per user per month spending > $1,000) and the drug’s Medicare market share (i.e., the percent of users of the drug that are Medicare beneficiaries). The results of this study will help inform recent policy proposals put forth by the U.S. Secretary of Health and Human Services related to changing the cost-sharing structure of catastrophic coverage in Medicare Part D. It will also have important implications if, as proposed, many physician-administered specialty drugs are moved to Part D coverage.