Millions of America’s elderly rely on the Medicare Part D program to afford prescription medications. Because adherence to prescription medications is a primary determinant of treatment success, Medicare Part D represents one of the most critical programs to the overall health of the elderly in this country. However, despite the availability of a prescription drug benefit, many Medicare beneficiaries still struggle to afford prescription drugs. The Centers for Medicare and Medicaid Services (CMS) reports a growing disparity between gross Part D drug costs, calculated based on costs of drugs at the pharmacy counter, and net Part D drug costs, which account for all Direct and Indirect Remuneration (DIR). The growing divergence between gross and net spending in Medicare Part D has significant implications for the Part D program. This is because the majority of a Medicare enrollee’s cost share is determined from gross, and not net, drug spending. Medicare is not the first program to struggle with prescription drug costs. Medicaid, another federal program overseen by CMS, has adopted a relatively new model for paying for prescription drugs – one that aligns program costs to surveyed benchmarks meant to approximate the prices paid by pharmacies to purchase medications. The most common benchmark utilized by state Medicaid programs is National Average Drug Acquisition Cost (NADAC), which is typically used as the basis for both the state’s cost exposure and the pharmacy’s reimbursement for the drug’s ingredient cost. Because NADAC is meant to cover just the cost of the drug itself, it is then coupled with a professional dispensing fee that is meant to cover the cost of the service and overhead incurred by pharmacy providers. Amidst growing complaints from providers and patients regarding the inflated and unpredictable prices for prescription drugs within the program, 3 Axis Advisors explored how application of the bedrock of Medicaid’s drug pricing design into Medicare might alleviate ballooning costs within the program.
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