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Summary: The Government Accountability Office's Report on Medicare Part D Rebates

On September 5, 2023, the United States Government Accountability Office (GAO) published its report titled Medicare Part D: CMS Should Monitor Effects of Rebates on Plan Formularies and Beneficiary Spending.[1],[2] The report discusses the GAO’s assessment of Medicare Part D and the “function of rebate arrangements in pharmaceutical markets, including their effect on drug spending, utilization, and competition.” Upon completion of their review, the GAO recommended that the Centers for Medicare and Medicaid Services (CMS) “should monitor the effect of rebates on plan sponsor formulary design and on Medicare and beneficiary spending to assess whether rebate practices are likely to substantially discourage enrollment by certain beneficiaries.” The Department of Health and Human Services (HHS) did not concur with the GAO’s recommendation.

This article provides a high-level summary of the aforementioned GAO report and does not provide a position, advice, or analysis related to report methodology or findings. It is recommended that the full report is reviewed for full context and statistics that were provided. All quotations are cited from GAO-23-105270.  

What the GAO Was Asked To Do

At the request of congressional leaders, the GAO was asked to evaluate the effects of rebates across the Medicare Part D Program. The GAO “assessed the Medicare Part D program to:

  • [D]escribe rebate and expenditure information for Part D drugs;
  • [D]escribe the types of rebate arrangements negotiated between selected pharmaceutical manufacturers and Part D plan sponsors;
  • [D]escribe the relationship between rebates and Part D formulary placement for competing drugs;
  • [D]escribe the implications of rebates on spending by Part D plan sponsors, beneficiaries, and the Medicare program; and
  • [E]xamine how, if at all, CMS considers rebate data as part of its oversight of Part D plan formularies.”

Methodology Used by the GAO

The GAO used 2021 CMS Part D prescription drug expenditure and rebate data to perform the analysis. 

Drug Expenditures

Prescription drug event data was used to calculate the amount paid to pharmacies (gross expenditures).

The GAO focused on “gross expenditures for Part D drugs (i.e., the amount paid to pharmacies by plan sponsors and beneficiaries)” which does not take into account rebate payments. In order to calculate net expenditures, the GAO would subtract rebates from gross expenditures to calculate net expenditures.”

Rebate Data

The GAO “reviewed 2020 rebate agreements negotiated between six drug manufacturers and six Part D plan sponsors, or [pharmacy benefit managers (PBMs)] on their behalf, for 24 brand-name drugs.” The six manufacturers were selected because they were the makers of the 24 brand-name drugs. The 24 brand-name drugs were selected based on one or more of the following factors:

  • “Had at least one drug formulation that was among the 100 most highly rebated in 2020,
  • Were competitors of highly rebated drugs, or
  • Were biologics.”

The six Part D plan sponsors were selected among the 25 largest sponsors by contract enrollment in 2020.

Rebate data was obtained using CMS’s direct and indirect remuneration data.

The names of the specific drugs, manufacturers, and Part D sponsors included in the GAO’s analysis were not disclosed.

Evaluating Rebates and Formulary Placement

The GAO reviewed 2021 formularies, rebates, and expenditure data across brand-name competitor drugs and brand-name drugs with generic counterparts. 

Brand-Name Competitor Drugs: The GAO identified 10 groups of competitor drugs and evaluated if highly rebated drugs were preferred compared to the competitor drugs.

Brand-Name Drugs with Generic Counterparts: The GAO reviewed rebated brand-name drugs that had counterparts under a generic name and analyzed the formulary placement of the brand drugs compared to the generic. It focused on 40 highly rebated brands with generics as compared to other brands with generics. 

Evaluating Rebates on Spending by Part D Plan Sponsors, Beneficiaries, and the Medicare Program

The GAO used the 2021 drug expenditure and rebate data to “determine

  • [T]he total amount spent by these payers for the 100 highest rebated drugs—those accounting for approximately 80 percent of all Part D rebates—analyzed in our first reporting objective and
  • [S]pending per utilization for the drugs within the 10 selected brand-name competitive groups and 40 selected brand-name drugs with generic counterparts analyzed in our third reporting objective.”


The GAO interviewed CMS officials about Part D statutes, regulations, oversight processes, and the use of rebate information for formulary reviews. Furthermore, they interviewed officials from the Federal Trade Commission (FTC) about perspectives surrounding antitrust, competition, and rebate practices.

GAO also “interviewed or obtained written responses from representatives from three pharmaceutical manufacturers and four Part D plan sponsors including those associated with a PBM…”

What the GAO Reported

Pharmaceutical manufacturers paid plan sponsors $48.6 billion in rebates in 2021, which accounted for 23.1 percent of the $210.6 billion in Part D gross expenditures. Accounting for rebates resulted in $162 billion in net expenditures in 2021.”

Part D Drug Rebates were Concentrated among a Few Therapeutic Classes and a Small Number of Brand-Name Drugs

  • Three classes of drugs accounted for a large percentage of rebates which included: endocrine metabolic agents, blood modifier agents, and respiratory agents. “Among all Part D drugs, these three classes combined accounted for 73 percent of rebates, 40 percent of gross expenditures, and 19 percent of utilization.”
  • “Of the $48.6 billion in rebates in 2021, 84.2 percent  — $40.9 billion — were for 100 Part D drugs, representing 1.3 percent of all Part D drugs. These 100 drugs accounted for 42.5 percent of gross Part D expenditures and 6.5 percent of utilization.”

Selected Part D Plan Sponsor and Manufacturer Rebate Agreements and Perspectives

The following conditions were found in rebate agreements for the six plan sponsors and six manufacturers for the 24 selected brand drugs.

Common Parameters:

  • Preferred Formulary Tier. Rebate agreements were contingent on lower tiering or favorable cost sharing compared to competitor drugs.
  • Number of Competitors. Rebate amounts were based on the number of manufacturer drugs which were on a preferred tier with the rebated drug. Rebates were higher based on the number of competitors on the formulary and hierarchy of tiering designations compared to competitor drugs.
  • No restrictions for the rebated drug. Utilization management restrictions would not be permitted if it favored a competitor drug.
  • Competitors subject to restrictions. It was acceptable to place utilization restrictions on competitor drugs.
  • No generic equivalentsRebates would be permitted so long as there were no generic equivalents available and, in some cases, as long as the drug was not on “the same or a more preferred tier on the formulary.”

Additional Parameters (less common):

  • Bundling. The manufacturer’s agreement required other drugs made by the manufacturer to be preferred drugs as well.
  • Specifying a competitor drug. The agreement explicitly named the competitor drug and parameters for allowing or restricting coverage of that competitor drug.
  • Targeting number of beneficiaries covered. The manufacturer would define the target number of beneficiaries who would have access to the drug. This is to gain access to plans which have higher enrollment versus lower enrollment plans.
  • Beneficiaries must try a rebated drug before a competitor’s. If a drug was subject to utilization management (e.g., step therapy), the rebated drug would be the first step and competitor drugs would be subsequent steps.
  • Rebates based on sales. Agreements would include parameters of the drug achieving specific sales thresholds in order to pay rebates.

Plan Sponsor and Manufacturer Perspectives

Through the interview process, perspectives from the plan sponsors (and if applicable the associated PBMs) and manufacturers were shared with the GAO.

  • Plan Sponsors. Their goal is to “obtain drugs at the lowest possible net cost.” “They noted that plan sponsors prefer to focus on obtaining rebates and using them to lower premiums for all beneficiaries.”
  • Manufacturers. Their goal is to gain the least restrictive formulary access for their drugs compared to competitor drugs.

Part D Plan Sponsors Frequently Gave Highly Rebated Drugs Preferred Formulary Placement

  • “In the majority of competitive groups—seven of the ten—more formularies preferred relatively higher-gross-cost, highly rebated drugs than preferred the lowest-gross-cost drug in the group. In general, rebates lowered the plan sponsors’ net costs for the higher-gross-cost drugs in the group below that of the lower-gross-cost drugs. Moreover, in three of these groups, plan sponsors received more in rebates than they paid for the higher-gross-cost, highly rebated drugs, resulting in a net profit with respect to these specific drugs based only on the rebates received.”
  • “In the remaining three of the 10 competitive groups [that the GAO] reviewed, more formularies preferred the lowest-gross-cost drug than the relatively higher-gross-cost, highly rebated drugs in the group. In two of these three competitive groups, net plan sponsor payments for the lowest-gross-cost drugs remained lower than their net payments for the higher-gross-cost, highly rebated drugs. Conversely, in one of these three competitive groups, net plan sponsor payments were lower for higher-gross-cost drugs than for the lowest-cost drug in the group after accounting for rebates.”

Generic Counterparts for Highly Rebated Drugs Were Less Frequently Listed on Formularies than Generic Counterparts for Other Drugs

  • It was not common for brand drugs with generic counterparts to have rebate agreements; however, there were still some brand drugs with generic counterparts that did have agreements and accounted for $6.4 billion in rebates.

Implications of Part D Rebates on Plan Sponsor, Beneficiary, and Medicare Spending

The GAO reported that: 

  • “In general, rebates may reduce plan sponsor payments (i.e., plan sponsors’ net spending after accounting for rebates) for higher-gross-cost drugs to an amount below what the payment would be for lower-gross-cost, competitor drugs.”
  • “Rebates…do not lower beneficiary payments for prescription drugs, which are based on the gross cost of the drug before accounting for rebates.”
  • “[H]igher-gross-cost drugs generally result in higher beneficiary payments relative to beneficiary payments for lower-gross-cost competitor drugs.”
  • “While rebates do not reduce costs for individual beneficiaries that are prescribed highly rebated drugs, rebates may lower the cost of premiums for Part D beneficiaries in the aggregate and for the Medicare program…”

The 100 highest rebated Part D drugs and All Other Part D drugs:

  • “[B]eneficiary payments – paid by beneficiaries or other payers on their behalf – were more than plan sponsor payments for the majority of the 100 highest rebated Part D drugs…after accounting for rebates.”

The 10 Competitive Drug Groups

  • For eight of the ten groups, net plan sponsor payments per utilization was lower for higher gross-cost/highly rebated drugs compared to lower-gross-cost drugs.
  • For higher-gross-cost/highly rebated drugs, beneficiary payments were generally higher than for lower-gross-cost drugs.

Review of the 40 Highly Rebated Brand-Name Drugs with Generic Counterparts

  • “[G]ross drug costs and beneficiary payment per utilization were higher, on average, for the brand-name drugs compared to their generic counterparts, while net plan sponsor payments per utilization were lower, on average after accounting for rebates.”

CMS Does Not Consider Rebate Data as Part of the Oversight of Part D Plan Formularies

The GAO discussed their review of current CMS processes of formulary review and current statutes, regulations and guidance which is followed by CMS, however, excludes rebate data. CMS discussed with the GAO that their focus is an “annual clinical review of formularies” and focuses on beneficiary access, review of plan designs, and formularies to ensure these aspects do not “substantially discourage beneficiary enrollment.” Furthermore, CMS shared with the GAO that the “statutory non-interference clause, which prohibits CMS from interfering with the negotiations between drug manufacturers and Part D plan sponsors or requiring a particular formulary or price structure, prevents them from considering plan rebate arrangements as part of the agency’s formulary review.”

GAO Conclusions

  • “[R]ebates may reduce Part D drug spending because they lower Medicare’s monthly payments to plan sponsors, and plan sponsors use rebates to lower beneficiary premiums.”
  • Rebates may encourage plans to place higher-gross-cost, highly rebated drugs on their formularies versus lower-cost alternatives which generally means beneficiaries pay more for these drugs.
  • Attributed to low-income subsidies, this means these costs are paid for by the Medicare program.
  • CMS currently only performs a clinical review of formularies and compared to CMS’s perspective “[m]onitoring the effects of rebates would not require CMS to interfere with negotiations between plan sponsors and drug manufacturers and would provide CMS, Congress, and others additional insight on the extent to which rebates’ influence on formularies could discourage enrollment of certain beneficiaries.”
  • Monitoring would also provide CMS with information related to provisions under the Inflation Reduction Act of 2022.

GAO Recommendation

The Administrator of CMS should monitor the effect of rebates on plan sponsor formulary design and on Medicare and beneficiary spending to assess whether rebate practices are likely to substantially discourage enrollment by certain beneficiaries.”

Response from Health and Human Services

HHS did not concur with the GAO’s recommendation and stated “it already performs a Part D formulary review to ensure compliance with Part D requirements…any analysis of the current rebate structure would not be reflective of the future Part D benefit design, due to impending changes to the Part D program as required under the IRA, which includes implementation of the new Medicare Drug Price Negotiation Program, under which HHS will negotiate maximum fair prices on behalf of the Medicare program for certain high expenditure, single source drugs.”

[1] GAO-23-105270

[2] Testimony was published on September 19, 2023: Medicare Part D: CMS Should Monitor Effects of Rebates on Drug Coverage and Spending where the GAO provided a summary of the report to the Subcommittee on Health (Committee on Energy and Commerce, House of Representatives).  GAO-23-107056.

© Copyright 2023. The views expressed herein are those of the author(s) and not necessarily the views of Ankura Consulting Group, LLC., its management, its subsidiaries, its affiliates, or its other professionals. Ankura is not a law firm and cannot provide legal advice.


medicare, medicare part d, pbm, drug pricing, rebates, healthcare & life sciences, healthcare compliance, healthcare operations, article

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