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Costco approach could have saved Medicare $2.6 billion in drug spending, analysis shows

By Maggie Fox and Tami Luhby, CNN

Medicare spent billions more money on generic drugs for its beneficiaries than warehouse chain Costco did for the same drugs, according to an analysis published Tuesday.

This overspending hit $2.6 billion in 2018, Erin Trish, associate director of the University of Southern California’s Schaeffer Center for Health Policy and Economics, and colleagues wrote in a letter to the Journal of the American Medical Association’s JAMA internal Medicine.

They compared the amount Medicare pays for common generic prescriptions in its Part D prescription coverage with prices available to patients without insurance at Costco for 184 common generic drug products.

“Medicare overspent by 13.2% in 2017 and 20.6% in 2018 compared with Costco member prices for these prescriptions,” they wrote. “Total overspending increased from $1.7 billion in 2017 to $2.6 billion in 2018.”

Beneficiaries did not pay this difference directly — their average cost sharing was $1 for preferred generic medications and $6 for nonpreferred generic medications in 2018. But Medicare costs come out of taxpayer money, and part D members pay premiums.

“These low out of pocket costs mask the fact that Medicare overpaid on 43.2% of prescriptions for the most common generic medicines that year,” the researchers wrote.

“In comparison, Costco’s streamlined distribution system could have saved $2.6 billion on these 184 drugs. With generic medications accounting for 22% of Part D spending, eliminating generic overspending could significantly reduce beneficiary premiums and federal spending,” they added.

“We chose Costco as a comparison because it is an example of a system where the incentives are set up to deliver value on total cost, much like paper towels,” Trish told CNN in an email.

“Patient cost-sharing for generics in Medicare Part D tends to be low, but this masks a system that is not currently set up to deliver value to the program overall,” she added.

“While price competition is strong for these drugs, the program leaves room for intermediaries to capture much of this value. Our findings show that in systems like Costco’s, where incentives are set up to deliver value to the consumer, that is what happens.”

Medicare contracts with insurers to provide Part D coverage, and insurers work with pharmacy benefit managers (PBMs) to run the drug benefits. The PBMs are often owned by the insurers, which can complicate incentives to provide the lowest price to Medicare and taxpayers.

Also, the Part D program hasn’t kept up with the changes in the industry that have reduced Medicare beneficiaries’ drive to shop for plans based on premiums. Many enrollees are now in private Medicare Advantage plans, which include Part D benefits.

“There’s a lot we can do to restore competition in this program,” Trish told CNN. “We could improve the value we deliver to beneficiaries and to taxpayers, but we need to improve the incentives for plans to care to try harder to get more value out of PBMs.”

Although the push in Congress and in the Biden administration has focused on lowering drug prices by allowing Medicare to negotiate the prices of brand name drugs with manufacturers, the generic medicine industry is already competitive. The issue is more about bringing additional transparency to the supply chain and to the practice of spread pricing, where PBMs keep a portion of the amount paid for a drug as profit, Trish said.

Oregon Sen. Ron Wyden, a Democrat who chairs the powerful Senate Finance Committee, has included transparency measures in his drug price legislation, which never made it out of committee. Last month, in a renewed effort to push for reform, he issued a set of principles that include shedding more light on supply chain practices to reduce drug prices for patients at the pharmacy counter.

“I think that the issue is not that the PBMs can’t negotiate low prices, but rather that they don’t have a strong enough incentive to pass those on to the consumer (in the way that Costco does). More transparency and competition in the supply chain would help, as would improvements to Part D to enhance competition among plans,” Trish said.

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