Prices for and Spending on Specialty Drugs in Medicare Part D and Medicaid

There has been considerable interest in the prices paid for specialty drugs and the amount of spending on such drugs. In particular, concerns have been raised regarding the effects of such drugs on federal spending and the out-of-pocket costs incurred by some beneficiaries. In this paper, we analyze trends in specialty drug pricing and spending (net of manufacturer rebates and discounts) in Medicare Part D and Medicaid over the 2010-2015 period. We also examine changes in out-of-pocket costs for Medicare Part D beneficiaries.

We adopt the definition of specialty drugs developed by IMS Health. Under that definition, specialty drugs treat a chronic, complex, or rare disease and have at least four of seven additional characteristics (such as costing at least $6,000 per year and requiring special handling in the supply chain). We use beneficiary-level claims data for Medicare Part D to estimate total spending at retail prices and the number of units and prescriptions dispensed over the 2010-2015 period by drug. We also have data on total rebates and discounts paid by drug manufacturers under Part D by drug during that period, which we use to estimate net prices and spending for specialty drugs. For Medicaid, we use data on total spending at retail prices, the number of prescriptions and units dispensed, and the statutory rebate amounts by drug over the 2010-2015 period. We then combined those data with Redbook data (by NDC code), which has drug product characteristics as well as with a list of specialty drugs on the market in 2015 provided by IMS Health.

Our results indicate that growth in spending on specialty drugs was the key driver of spending growth in both Medicare Part D and Medicaid’s outpatient drug benefit from 2010 to 2015. On a per capita basis, spending on specialty drugs increased substantially in Part D and more modestly in Medicaid, while spending on traditional drugs declined in both programs. Spending per capita for both specialty drugs and traditional drugs was higher in Medicare Part D than in Medicaid—and such spending grew at a faster rate under Medicare Part D—because of differences in how prices are determined in the two programs and differences in the mix of drugs used by beneficiaries in the two programs.

Retail prices paid for specialty drugs are similar under Part D and Medicaid. However for 50 top selling brand-name specialty drugs, net prices paid by Medicaid were much lower than those in Medicare Part D on average because the statutory rebates under Medicaid are much greater than the rebates Part D plans are able to negotiate from manufacturers. In addition, average net prices paid for brand-name specialty drugs increased much more quickly in Medicare Part D than in Medicaid over the 2010 to 2015 period.

We also use the Medicare Part D claims data to examine trends in the mean and distribution of beneficiaries’ out-of-pocket costs for specialty drugs over the 2010-2015 period.