How are Medicare plans lowering drug costs for beneficiaries?

Promote generic drug use

Generic drugs have the same active-ingredient formula as their brand-name drug counterparts but generally cost less. Generic drugs can enter the market once a brand-name drug’s patent expires, which typically lasts 17 years. The costs of generic drugs are usually between 80 and 85 percent lower than brand names.

Medicare and Medicare Advantage plans can encourage beneficiaries to use generic drugs when the option is available, which can lower costs for plans and beneficiaries.

According to HHS, 82 percent of Medicare Part D beneficiaries (43.3 million) filled 1.1 billion prescriptions for generic drugs in 2022. Nearly half of beneficiaries filled at least one prescription for $2 or less.

Utilization management strategies such as step therapy can help increase the use of generic drugs. In step therapy, payers require patients to try alternative, lower-cost medications before taking the one their provider prescribed. While this may help improve affordability at times, it can also adversely impact patient outcomes in cases where a certain brand is needed for the given condition.

Formulary management

One way plans can encourage generic drug use is by including these medications in their formularies. Sometimes called a preferred drug list, a formulary lists generic and brand-name prescription drugs covered by a specific health insurance plan.

Medicare Part D drug plans and Medicare Advantage plans typically include a choice of at least two drugs in the most commonly prescribed categories and classes. Health plans add medications to their formularies to encourage beneficiaries and prescribers to choose safe, effective, and affordable medications. By only including cost-effective drugs on their formularies, health plans can increase affordability for beneficiaries and likely reduce overall drug costs.

Establish preferred pharmacy networks

Similar to drug formularies, Medicare Advantage plans can establish their preferred pharmacy network in a way that helps lower costs. When beneficiaries receive their medications from their plan’s preferred pharmacies, copayments or coinsurance rates are often lower than they’d be at non-network pharmacies.

Plans can often negotiate discounted prices with the pharmacies in their preferred networks, enabling them to pass on savings to beneficiaries.

Preferred pharmacy networks can also advance the shift towards value-based care, according to the Academy of Managed Care Pharmacy (AMCP). Health plans can create risk-sharing arrangements with preferred pharmacy networks that promote generic drug utilization, triggering pharmacy participation in patient care management. With pharmacies and health plans both responsible for risk, they can work together to improve medication adherence and utilization by ensuring beneficiaries receive the proper medications at a low cost.

Work with pharmacy benefit managers

By partnering with pharmacy benefit managers (PBMs), Medicare and Medicare Advantage plans can negotiate lower drug prices for beneficiaries. PBMs are third-party entities that manage prescription drug benefits for several types of health plans, including Medicare Part D plans. Their responsibilities include negotiating rebates and discounts with drug manufacturers, creating formularies, establishing pharmacy networks, and processing claims.

PBMs negotiate drug prices with manufacturers typically by offering a spot for a drug on the health plan’s formulary in exchange for paying the manufacturer a lower price and receiving a rebate. PBMs can also negotiate with pharmacies by offering them a place in the health plan’s network for specific drug prices.

PBMs save payers and beneficiaries an average of $1,040 per person per year and reduce costs by $10 for every $1 spent on PBM services, according to data from the Pharmaceutical Care Management Association.

PBMs have also faced scrutiny from healthcare stakeholders, with some saying PBMs are incentivized to favor expensive drugs over cost-effective options, as they receive rebates that are based on the manufacturer’s list price. This practice may lead to higher out-of-pocket costs for health plan members.

The lack of transparency around where PBM revenues come from may impact their ability to improve affordability for beneficiaries. In addition, the PBM market has been consolidated into three main companies that control most of the industry, allowing for little competition.

The Inflation Reduction Act (IRA) welcomed the opportunity for Medicare to negotiate drug prices with manufacturers. Although consumers are not feeling the effects of the policy yet, the standards could potentially improve the affordability of high-cost drugs.

The drug price negotiation provision included in the legislation will allow the public program to negotiate prices for certain drugs covered under Medicare Part D starting in 2026 and Part B starting in 2028.

In August 2023, CMS announced the first ten Part D drugs that will be available for price negotiation in 2026: Eliquis, Jardiance, Xarelto, Januvia, Farxiga, Entresto, Enbrel, Imbruvica, Stelara, and Fiasp with its various delivery mechanisms. These drugs accounted for $50.5 billion in total Part D gross prescription drug costs between June 1, 2022, and May 31, 2023.

Following the negotiation process, CMS will publish prices for these first ten drugs by September 1, 2024, which will become effective starting January 1, 2026. The agency has 15 additional Part D drugs to select for negotiation for 2027, 15 more Part D or Part B drugs for 2028, and 20 more for each year after that.

Until the price negotiations take effect, the IRA’s ability to improve drug affordability in Medicare will be unclear. With only certain drugs eligible for price negotiation, the process may only benefit a subset of beneficiaries.