Department of Health and Human Services
OFFICE OF 
 
INSPECTOR GENERAL 
 
 
 
 
 
 
 
 
C W R  
ONC  ERNS  ITH  EBATES 
 
 
IN THE
 
 
M P D P  
EDICARE  ART    ROGRAM 
 
 
 
 
Daniel R. Levinson  
Inspector General 
 
March 2011 
OEI-02-08-00050   
 
 E X E C U T I V E   S U M M A R Y  
OBJECTIVES
 
1.  To determine the extent to which all Part D sponsors received 
rebates in 2008. 
2.  To determine the extent to which all Part D sponsors passed rebates 
on to beneficiaries.   
3.  To describe the nature of the rebates received by selected sponsors.  
4.  To describe the nature of selected sponsors contractual relationships 
with pharmacy benefit managers (PBM). 
BACKGROUND 
Under the Medicare Part D program, private insurance companies, 
known as sponsors, provide drug coverage to beneficiaries who choose to 
enroll.  These sponsors are responsible for reducing the cost of the 
program by negotiating rebates from drug manufacturers.  Drug 
manufacturers provide rebates to increase drug sales.   
Rebates can substantially reduce the cost of the Part D program; 
however, sponsors must accurately report these rebates for the 
Government and beneficiaries to receive any cost savings.  Prior to this 
review, little information was publicly available about the extent to 
which sponsors receive rebates for Part D drugs and pass them on to the 
Government and beneficiaries.  Also, little was known about the nature 
of rebates and the contractual relationships between sponsors and 
PBMs, the third-party entities that often negotiate for rebates on behalf 
of sponsors.   
Before the beginning of each plan year, sponsors must provide the 
Centers for Medicare & Medicaid Services (CMS) with bids that contain 
information about the rebates they expect to receive.  CMS uses these 
bids to calculate beneficiary premiums.  After the close of the plan year, 
sponsors must provide CMS with information about the actual amount 
of rebates they received.  CMS uses this information to determine the 
amount that the Government ultimately pays each sponsor for 
providing the benefit.  If sponsors receive rebates at the sponsor level, 
rather than the plan level, CMS requires that sponsors allocate a 
portion of these rebates to each of their plans.  The methods sponsors 
use can affect the amounts that the Government ultimately pays 
sponsors for providing the benefit. 
OEI-02-08-00050    CONCERNS WITH REBATES IN THE MEDICARE PART D PROGRAM  i   
   
EE XX EE CC UU TT II VV EE    SS UU MM MM AA RR YY   
We based this study on a review of all Part D sponsors Direct and 
Indirect Remuneration Reports for Payment Reconciliation (hereinafter 
referred to as rebate reports) for 2008, Prescription Drug Event data for 
2008, all sponsors bids for 2008, contracts from six selected sponsors, 
and structured interviews with these six sponsors.  
FINDINGS 
Medicare Part D sponsors reported receiving $6.5 billion in drug 
manufacturer rebates in 2008.  On average, this equaled $275 per 
beneficiary, or about $7 per drug dispensed in 2008.  These rebates were 
approximately 10 percent of total gross Part D drug costs, which were  
$63 billion in 2008.  Some sponsors reported large differences in rebates 
across their plans.  How sponsors allocate rebates across their plans may 
affect the amount that the Government ultimately pays sponsors for 
providing the benefit.  
Sponsors commonly underestimated rebates in their bids, which led 
to higher beneficiary premiums.  Sponsors underestimated rebates in 
69 percent of their bids for plan year 2008.  When sponsors 
underestimate rebates in their bids, beneficiary premiums are higher 
than they otherwise would be and both the Government and 
beneficiaries overpay for the benefit.  Although the Government recoups 
some of the overpayments, beneficiaries do not. 
Selected sponsors received rebates when they encouraged 
beneficiaries to use certain drugs.  The six sponsors we reviewed 
received two distinct types of rebates:  formulary rebates and market-
share rebates.  Formulary rebates were provided when sponsors 
formularies encouraged beneficiaries to use certain drugs over others, 
whereas market-share rebates were based on the total number of the 
rebated drugs that beneficiaries used compared to the total number of 
other drugs used.     
Selected sponsors had complex contractual relationships with PBMs 
that sometimes lacked transparency.  CMS holds sponsors ultimately 
responsible for accurately reporting rebates and for ensuring that their 
PBMs comply with CMS requirements.  The lack of transparency raises 
concerns that sponsors may not always have enough information to 
oversee the services and information provided by PBMs.  In addition, the 
selected sponsors reported that their PBMs collected fees from drug 
manufacturers that were not always passed on to the Part D program. 
 
  OEI-02-08-00050  CONCERNS WITH REBATES IN THE MEDICARE PART D PROGRAM  ii   
   
E X E C U T I V E   S U M M A R Y  
RECOMMENDATIONS 
Because of the size of these rebates, it is vital that rebates be reported 
accurately and that the Government and beneficiaries receive the full 
benefit of these rebates.  Our review identified several concerns about 
these rebates.  Based on these findings, we recommend that CMS: 
Take steps to ensure that sponsors more accurately include their 
expected rebates in their bids.  After the close of each plan year, CMS 
should compare the actual rebates that sponsors reported to the rebates 
in sponsors bids.  CMS should work with the sponsors that have 
particularly large differences to ensure that these differences do not 
occur in the future.  CMS should also consider targeting these sponsors 
in its financial audits.   
Require sponsors to use methods CMS deems reasonable to 
allocate rebates across plans.  The method sponsors use to allocate 
rebates across plans may affect the amount that the Government pays for 
the Part D program.  In its guidance for reporting 2009 rebates, CMS 
provides a list of allocation methods it considers reasonable, such as 
allocating rebates based on drug utilization or spending.  CMS should 
require sponsors to either use one of the methods it determines to be 
reasonable or submit documentation proving that an alternative method 
is reasonable.   
Ensure that sponsors have sufficient audit rights and access to 
rebate information.  Sponsors are ultimately responsible for accurately 
reporting their rebates to CMS.  CMS should ensure that sponsors have 
sufficient information to accurately report rebates.  To do this, CMS 
could require sponsors to have stronger provisions in their contracts 
related to their audit rights and access to rebate information.  CMS 
could also provide more detailed guidance to sponsors about how they 
should monitor PBM rebate information. 
Ensure that sponsors appropriately report the fees that PBMs 
collect from manufacturers.  CMS should clarify when these fees should 
be reported as rebates.  In addition, beginning for plan year 2009, CMS 
required sponsors to report all payments that meet the definition of bona 
fide service fees, including those that the PBM retains and does not 
share with the sponsor.  CMS should use this information to monitor the 
fees and ensure that they were reported appropriately.   
 
 
  OEI-02-08-00050  CONCERNS WITH REBATES IN THE MEDICARE PART D PROGRAM  iii   
   
E X E C U T I V E   S U M M A R Y  
AGENCY COMMENTS AND OFFICE OF INSPECTOR GENERAL 
RESPONSE 
CMS concurred with one of our recommendations in the draft report and 
partially concurred with another.  CMS did not concur with the 
remaining two recommendations.   
CMS concurred with our first recommendation, to ensure that sponsors 
more accurately include rebates in their bids.  CMS stated that it will 
consider adding to its bid review a comparison of the rebates sponsors 
actually receive to the rebates they report in their bids.   
CMS did not concur with our second recommendation, to require 
sponsors to use certain methods to allocate rebates across plans.  CMS 
stated that it currently requires sponsors to use a reasonable allocation 
methodology that reflects differences in utilization and spending.  
However, our findings show that sponsors may be inappropriately 
allocating rebates across plans.  Because this may result in a loss to the 
Government, we continue to recommend that CMS require sponsors to 
use allocation methods it deems reasonable.  In our final report, we 
reworded the recommendation and added a sentence recommending 
that if sponsors choose an alternative method, they must submit 
documentation proving that it is reasonable.   
CMS did not concur with our third recommendation, to require sponsors 
to have sufficient audit rights and access to rebate information.  It 
stated that it believes the current regulatory framework strikes the 
appropriate balance to encourage sponsors to negotiate sufficient 
disclosure of information from their PBMs, while recognizing the PBMs 
view that certain information is highly confidential.  We are aware of 
the current regulatory framework and the importance of balancing the 
interests of sponsors and PBMs.  However, this report shows that some 
Part D sponsors have limited rights to audit their PBMs and limited 
access to information about their rebates.  In response to CMSs 
comments, we modified our recommendation and offered two ways for 
CMS to ensure that sponsors have sufficient audit rights and access to 
rebate information.   
CMS partially concurred with our fourth recommendation, to ensure 
that sponsors appropriately report the fees that PBMs collect from 
manufacturers.  CMS noted that it does not concur that more specificity 
is required in the definition of bona fide service fees.  However, this 
report shows that sponsors are reporting these fees differently.  While 
  OEI-02-08-00050  CONCERNS WITH REBATES IN THE MEDICARE PART D PROGRAM  iv   
   
E X E C U T I V E   S U M M A R Y  
CMS may not need to change the definition of bona fide service fees, it 
may need to provide additional guidance or clarification about when 
sponsors need to report these fees as rebates.   
  OEI-02-08-00050  CONCERNS WITH REBATES IN THE MEDICARE PART D PROGRAM  v   
 
 T A B L E   O F   C O N T E N T S  
EXECUTIVE SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i
 
 
I N T RO DUC T IO N . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 
 
 
F I N D IN G S . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 
Medicare Part D sponsors reported receiving $6.5 billion in  
drug manufacturer rebates in 2008 . . . . . . . . . . . . . . . . . . . . . . . . 10 
Sponsors commonly underestimated rebates in their bids, 
which led to higher beneficiary premiums. . . . . . . . . . . . . . . . . . . 12 
Selected sponsors received rebates when they encouraged 
beneficiaries to use certain drugs. . . . . . . . . . . . . . . . . . . . . . . . . . 14 
Selected sponsors had complex contractual relationships with  
PBMs that sometimes lacked transparency. . . . . . . . . . . . . . . . . . 17 
 
 
R E C O MMEN D A T ION S . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 
Agency Comments and Office of Inspector General  Response. . . 21 
 
 
APPENDIX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 
A:  Agency Comments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 
   
 
 
A C K NO WL E D G M E N T S . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 
OEI-02-08-00050    CONCERNS WITH REBATES IN THE MEDICARE PART D PROGRAM     
   
I N T R O D U C T I O N  
 I N T R O D U C T I O N  
OBJECTIVES 
1.  To determine the extent to which all Part D sponsors received 
rebates in 2008. 
2.  To determine the extent to which all Part D sponsors passed rebates 
on to beneficiaries.   
3.  To describe the nature of the rebates received by selected sponsors.  
4.  To describe the nature of selected sponsors contractual relationships 
with pharmacy benefit managers (PBM). 
BACKGROUND 
The Medicare Part D program provides an optional prescription drug 
benefit to Medicare beneficiaries.1  Under the program, private 
insurance companies, known as sponsors, provide drug coverage to 
beneficiaries who choose to enroll.  These sponsors are responsible for 
reducing the cost of the program by negotiating rebates from drug 
manufacturers.  Drug manufacturers provide rebates to increase drug 
sales.   
Rebates can substantially reduce the cost of the Part D program; 
however, sponsors must accurately report these rebates for the 
Government and beneficiaries to receive any cost savings.  Prior to this 
review, little information was publicly available about the extent to 
which sponsors receive rebates for Part D drugs and pass them on to the 
Government and beneficiaries.  Also, little was known about the nature 
of rebates and the contractual relationships between sponsors and 
PBMs, the third-party entities that often negotiate rebates on behalf of 
sponsors.2    
The Medicare Part D Benefit  
Under Medicare Part D, sponsors may offer stand-alone prescription 
drug plans (PDP) or they may offer prescription drug coverage as part of 
a Medicare Advantage Prescription Drug Plan (also known as an  
 
1 The Medicare Prescription Drug, Improvement, and Modernization Act of 2003,  
P.L. 108-173.   
2 PBMs can provide a variety of services to sponsors to help manage their prescription 
drug benefit.  These services include processing prescription drug claims, contracting with 
pharmacies, managing formularies, as well as negotiating rebates with drug manufacturers.  
PBMs can be compensated for these services in a variety of ways, including receiving a fixed 
payment per claim or retaining a percentage of sponsors rebates.  
  OEI-02-08-00050  CONCERNS WITH REBATES IN THE MEDICARE PART D PROGRAM  1   
   
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means that the plans benefits must be of a dollar value equivalent to that of the standard 
benefit. 
4 42 CFR  423.780 and 42 CFR  423.782. 
5 The six protected classes include the immunosuppressant, antidepressant, 
antipsychotic, anticonvulsant, antiretroviral, and antineoplastic classes.  See  
42 CFR  423.120(b)(2)(i); Centers for Medicare & Medicaid Services (CMS), Prescription 
Drug Benefit Manual, ch. 6,  30.2.5.   Accessed at 
http://www.cms.hhs.gov/PrescriptionDrugCovContra/downloads/R2PDBv2.pdf on  
October 1, 2009. 
6 The Patient Protection and Affordable Care Act requires that CMS establish criteria to 
select the categories and classes of drugs it will consider as being of clinical concern.  See 
P.L. 111-148  3307 and 75 Fed. Reg. (Apr. 15, 2010), pp. 1976619767.   
  OEI-02-08-00050  CONCERNS WITH REBATES IN THE MEDICARE PART D PROGRAM  2   
   
I N T R O D U C T I O N  
require a beneficiary to try a less expensive alternative before 
progressing to a costlier drug.   
Price Concessions and Drug Manufacturer Rebates  
The Part D program relies on sponsors to negotiate drug manufacturer 
rebates and other price concessions to reduce the cost of the program to 
beneficiaries and the Government.  Price concessions are payments that 
decrease sponsors drug costs.7  Rebates from drug manufacturers are 
the most common type of price concessions.  Other types of price 
concessions include discounts, coupons, and other concessions that 
reduce the cost of drugs.  For example, if a sponsor received a payment 
from a pharmacy because of a risk-sharing or prompt payment 
agreement or a payment from a pharmaceutical manufacturer for a 
legal settlement, the payment is considered a price concession.8  
Sponsors pass rebates and other types of price concessions on to 
beneficiaries and the Government in several ways.  Sponsors must 
include expected rebates and other price concessions in their bids, which 
lowers the premiums beneficiaries pay for drug coverage (as discussed 
below).  Sponsors may pass the cost savings derived from rebates 
directly on to beneficiaries at the time they purchase drugs; these are 
called point-of-sale rebates.9  Additionally, sponsors pass rebates on to 
the Government by reporting their actual rebates to CMS, which uses 
them to adjust Part D payments in a process called payment 
reconciliation.10   
Reporting of Drug Manufacturer Rebates to CMS 
Before the beginning of the plan year, sponsors must provide CMS with 
information about all rebates that they expect to receive as a part of 
their bids.11   These bids provide CMS with an estimate of the cost to 
provide the benefit to each beneficiary.  CMS uses bids to calculate 
beneficiary premiums for each plan.  Any anticipated rebates sponsors 
 
7 42 CFR  423.308. 
8 CMS, Final Medicare Part D DIR Reporting Requirements for 2008 Payment 
Reconciliation, June 8, 2009, pp. 4, 6, and 7. 
9 70 Fed. Reg. 4195, 4244 (Jan. 28, 2005). 
10 42 CFR  423.315 and 423.343. 
11 Specifically, sponsors must include in their bids all price concessions that are not 
passed on to the beneficiary at the point of sale.  See CMS, Instructions for Completing the 
Medicare Prescription Drug Plan Bid Pricing Tool for Contract Year 2008, April 2007,  
p. 26. 
  OEI-02-08-00050  CONCERNS WITH REBATES IN THE MEDICARE PART D PROGRAM  3   
   
I N T R O D U C T I O N  
report to CMS in the bids reduce beneficiary premiums.12  CMS also 
uses the bids to calculate the monthly payments it makes to each 
sponsor for providing the benefit.  When sponsors underestimate 
rebates in their bids, both the Government and beneficiaries overpay for 
the benefit.  The Government recoups some, but not all, of the 
overpayments in a process known as reconciliation.  Beneficiaries do not 
recoup any of the money that they pay in higher premiums. 
During reconciliation, CMS compares the monthly payments it makes to 
the sponsor and the premiums charged to beneficiaries to the sponsors 
costs.  To do this, CMS requires sponsors to provide information about 
the actual rebates they receive in reports known as Direct and Indirect 
Remuneration (DIR) Reports for Payment Reconciliation (hereinafter 
referred to as rebate reports).13   The rebate amounts sponsors report 
reduce the amounts the Government pays the sponsors for providing the 
benefit.14  Sponsors must submit one rebate report for each plan.  
Sponsors must include all of the rebates and other price concessions 
that they receive, as well as any rebates that the PBMs retained.15  
Sponsors are not required to report administrative fees that PBMs 
collect from manufacturers if the fees meet certain conditions.16   
If sponsors receive rebates at the sponsor level, rather than the plan 
level, CMS requires that sponsors allocate a portion of these rebates to 
each of their plans using a reasonable methodology.  In its guidance 
for reporting 2009 rebates, CMS provided examples of allocation 
methodologies it considers reasonable, but it did not require sponsors to 
 
 
12 42 U.S.C.  1395w-113. 
13 For example, see CMS, Final Medicare Part D DIR Reporting Requirements for 2008 
Payment Reconciliation, June 8, 2009, p. 1.  See also U.S.C.  1395w-115(f)(1)(A). 
14 For more information about payment reconciliation, see Office of Inspector General 
(OIG), Medicare Part D Reconciliation Payments for 2006 and 2007 (OEI-02-08-00460), 
September 2009. 
15 If sponsors have not received all of their rebates at the time of reporting, they must 
report estimates of the amounts they expect to receive.  See CMS, Final Medicare Part D 
DIR Reporting Requirements for 2008 Payment Reconciliation, June 8, 2009, p. 11.   
16 According to CMS guidance, sponsors are not required to report administrative fees 
that PBMs collect and retain if the fees are for bona fide services and are at fair market 
value.  See CMS, Final Medicare Part D DIR Reporting Requirements for 2008 Payment 
Reconciliation, June 8, 2009, p. 7. 
  OEI-02-08-00050  CONCERNS WITH REBATES IN THE MEDICARE PART D PROGRAM  4   
   
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of or total spending for each drug is reasonable.  CMS, Final Medicare Part D DIR 
Reporting Requirements for 2009 Payment Reconciliation, June 10, 2010, pp. 1314.  CMS 
did not provide examples of reasonable allocation methods in its guidance for reporting 2008 
rebates. 
18 OIG, Medicare Part D  Prescription Drug Event Reconciliation Process  
(A-18-08-30102), June 2010, pp. 34 and 13. 
19 GAO, Medicare Part D Prescription Drug Coverage:  Federal Oversight of Reported 
Price Concessions Data, GAO-08-1074R, September 2008, p. 4. 
  OEI-02-08-00050  CONCERNS WITH REBATES IN THE MEDICARE PART D PROGRAM  5   
   
I N T R O D U C T I O N  
METHODOLOGY 
This study focuses on the rebates received by PDPs and MA-PD plans 
for the 2008 plan year.  It is based on data from five sources:   
(1) all Part D sponsors rebate reports for 2008, (2) Prescription Drug 
Event (PDE) data for 2008, (3) all sponsors bids for 2008, (4) contracts 
from six selected sponsors, and (5) structured interviews with these six 
sponsors. 
Review of Rebate Reports  
To determine the extent to which all Part D sponsors received 
manufacturer rebates, we reviewed the rebate reports that all sponsors 
submitted to CMS for 2008.  As mentioned earlier, these reports are 
known as the DIR Reports for Payment Reconciliation.  We downloaded 
these reports from CMSs Health Plan Management System.  We 
included all of the 2008 reports that sponsors submitted as of 
September 1, 2009.20 
We analyzed these rebate reports to determine the total amount of 
rebates that all sponsors reported receiving in 2008.  We also 
determined the amount of these rebates that were retained by PBMs as 
part of their compensation from sponsors and the total amount of other 
price concessions that sponsors reported receiving in 2008.  We further 
analyzed the reports to assess the percentage of sponsors that provided 
rebates to beneficiaries at the point of sale. 
To compare the rebates across sponsors, we calculated the per 
beneficiary per month amount of rebates that each sponsor received.  To 
accomplish this, we obtained from CMSs Health Plan Management 
System the number of beneficiaries enrolled in each plan for each month 
in 2008.21  We used this information to calculate each beneficiarys total 
enrollment months and aggregated these data for all plans offered by 
each sponsor.22  We then divided each sponsors total rebates by its total 
enrollment months.  We also compared the average per beneficiary per 
month rebate amount for sponsors with high, medium, and low 
 
20 We excluded Employer Group Waiver Plans from our analysis.  CMS pays sponsors for 
these plans differently, and as a result, the rebates sponsors receive are not shared with the 
Government and with beneficiaries in the same manner as described in this report.   
21 CMS Health Plan Management System, Enrollment Report by Plan, 2008.  
22 For example, one beneficiary enrolled for the entire year represented 12 enrollment 
months.    
  OEI-02-08-00050  CONCERNS WITH REBATES IN THE MEDICARE PART D PROGRAM  6   
   
I N T R O D U C T I O N  
enrollment.  We considered sponsors with 500,000 or more beneficiaries 
to have high enrollment, between 50,000 and 500,000 beneficiaries to 
have medium enrollment, and 50,000 or less to have low enrollment. 
Analysis of Prescription Drug Event Data 
Sponsors must submit a PDE record for each drug dispensed under  
Part D.  We used the PDE data to determine total Part D gross drug 
costs.23  We determined these costs for all Part D drugs dispensed in 
2008 based on three fields in the PDE data:  ingredient cost, dispensing 
fee, and sales tax.  We then calculated the total amount of rebates 
reported by sponsors as a percentage of total Part D gross drug costs.  
We also used the PDE data to determine the total amount of rebates 
sponsors provided to beneficiaries at the point of sale in 2008.  Sponsors 
must indicate whether they provided point-of-sale rebates in their 
rebate reports; however, the actual dollar amounts of these rebates are 
contained in the PDE data.   
Review of Bids 
We compared sponsors bids to their rebate reports for 2008.  For each 
plan, we compared the amount of rebates and other price concessions 
included in the bid to the actual amount of rebates and other price 
concessions reported in the rebate report on a per member per month 
basis. 24  If a sponsor reported fewer rebates in its bids than it actually 
received, then beneficiaries premiums were higher than they otherwise 
would have been. 
Review of Contracts 
We selected a purposive sample of six Part D sponsors to review in more 
depth.  We selected these six sponsors based on the number of 
beneficiaries enrolled in their plans and the PBMs they contracted with 
to get a variety of sponsors and PBMs for our review.  These six 
sponsors represented more than 25 percent of all Part D beneficiaries in 
2008.  
For each of these 6 sponsors, we selected a purposive sample of  
10 contracts that the sponsor or its PBM had with a drug manufacturer.  
To select these contracts, we first requested a list from each sponsor of 
 
23 Total gross drug costs are the total amount paid for Part D drugs before rebates are 
taken into account. 
24 We excluded the 16 plans that provided rebates to beneficiaries at the point of sale 
because CMS instructed sponsors to report these rebates in their bids differently from other 
rebates.   
  OEI-02-08-00050  CONCERNS WITH REBATES IN THE MEDICARE PART D PROGRAM  7   
   
II NN TT RR OO DD UU CC TT II OO NN   
all of the contracts it or its PBM had with drug manufacturers for 
rebates in 2008.  In total, the 6 sponsors or their PBMs had  
531 contracts with manufacturers.  From these lists, we selected  
10 contracts from each sponsor based on the manufacturer and the total 
dollar amount of rebates associated with the contract.  We reviewed 
these contracts to determine the types of rebates sponsors received from 
manufacturers and the specific terms and conditions of the rebates.   
We also requested and reviewed all of the contracts that the six 
sponsors had with PBMs in 2008.  In total, the six sponsors held  
nine contracts with PBMs.  We reviewed these contracts to determine 
the nature of the contractual relationships between the sponsors and 
their PBMs. 
Structured Interviews  
We conducted structured in-person and telephone interviews with 
officials from each of the six sponsors to gain a better understanding of 
their rebates and contractual relationships with PBMs.  If the sponsor 
contracted with a PBM to negotiate rebates, we requested that 
representatives from the PBM also be included in the interview.  In 
some cases, the representatives from the PBMs requested that we speak 
to them without the sponsors present because they considered the 
information confidential.    
Our questions to sponsors focused on what types of rebates the sponsors 
received, how they negotiated these rebates, and how they reported 
rebates to CMS in their bids and rebate reports.  We also asked how 
they contracted with PBMs and how they ensured that the information 
they received from their PBMs about rebates was accurate.  For some 
questions, such as how rebates were negotiated, the PBMs answered on 
behalf of the sponsors.  Our questions focused on the 2008 plan year.  
We conducted these interviews between December 2008 and April 2009. 
Limitations 
We determined the amount of rebates that sponsors received for plan 
year 2008 based on the rebate reports.  The information in these reports 
was provided by sponsors, and we did not independently verify these 
data.  
In addition, the information from the six sponsors that we reviewed in 
greater depth is not generalizable to all sponsors.  Lastly, because of the 
proprietary nature of the data on rebates, this report presents general 
information and does not include specifics about the rebate amounts 
and rebate agreements.  
  OEI-02-08-00050  CONCERNS WITH REBATES IN THE MEDICARE PART D PROGRAM  8   
   
II NN TT RR OO DD UU CC TT II OO NN   
Standards 
This study was conducted in accordance with the Quality Standards for 
Inspection and Evaluation issued by the Council of the Inspectors 
General on Integrity and Efficiency. 
  OEI-02-08-00050  CONCERNS WITH REBATES IN THE MEDICARE PART D PROGRAM  9   
   
  F I N D I N G S  
Medicare Part D sponsors reported  For 2008, Part D sponsors reported 
receiving $6.5 billion in drug  receiving $6.5 billion in manufacturer 
rebates for Part D drugs.  On average, 
manufacturer rebates in 2008  
this equaled $275 per beneficiary, or 
about $7 per drug dispensed in 2008. These rebates were approximately 
10 percent of total gross Part D drug costs, which were $63 billion in 
2008.25  
As shown in Chart 1, sponsors reported receiving varying amounts of 
rebates.26  Most commonly, sponsors reported receiving between  
$10 and $20 of rebates per beneficiary per month.  The sponsor with the 
highest amount of rebates reported  an average of $75 per beneficiary 
per month.   Interestingly, 17 percent of sponsors reported receiving no  
rebates at all. These sponsors typically had plans with very low 
enrollment, representing less than 1 percent of all beneficiaries enrolled  
in Part D.    
 
Chart  1: Average Rebates per Beneficiary per Month Received by Sponsors, 2008 
 
40%   38% 
s  
r
o
ns 30%     27% 
o
p
S
of  20%     17%   17% 
ge  8   
a5
t2
n=
ceN 10%    
r
Pe      
0%  
No Re bates Reported  $10 or Less  Between $10 and $20   $20 or More 
 
 
Source:  OIG analysis of sponsors rebate reports, 2010. 
Note:  Totals do not sum to  100 percent because of rounding.   
 
 
 
25 Total gross drug costs are the total amount paid for Part D drugs before rebates are 
taken into account. 
26 Sponsors reported to CMS the aggregate amount of rebates they received.  To compare 
these amounts across sponsors, we calculated each sponsors average per beneficiary  per 
month rebate amounts.  
  OEI-02-08-00050   CONCERNS WITH  REBATES IN THE MEDICARE PART D  PROGRAM   10   
   
F I N D I N G S  
Sponsors with large numbers of enrolled beneficiaries typically reported 
receiving larger rebates per beneficiary per month than sponsors with 
fewer enrolled beneficiaries.  As shown in Table 1, sponsors with high 
enrollment received an average rebate of almost $25 per beneficiary per 
month, whereas sponsors with low enrollment received an average 
rebate of about $11 per beneficiary per month.   
   
Table 1:  Rebates Received by Sponsors, 2008 
    Average Rebates  
Beneficiary Enrollment in Sponsors Plans 
Number of  Percentage of  per Beneficiary 
Sponsors  Beneficiaries  per Month 
High enrollment   8  72%  $25 
Medium enrollment    27  20%  $15 
Low enrollment  223  8%  $11 
Source:  OIG analysis of sponsors rebate reports, 2010. 
 
Some sponsors reported large differences in rebates across their plans 
The way sponsors allocate rebates across plans is important because it 
can affect the amount that sponsors owe to or receive from the 
Government during reconciliation.  CMS does not require sponsors to 
allocate rebates using any particular method.   
Specifically, 40 of the 258 sponsors reported receiving rebates that 
varied more than $25 per beneficiary per month across plans.27  In fact, 
one sponsor reported rebates that were $6 per beneficiary per month in 
one of its plans and $172 per beneficiary per month in another of its 
plans.  The difference across plans may be because of differences in the 
characteristics of the plans beneficiaries and their drug use.  However, 
these differences may also indicate that sponsors are inappropriately 
allocating rebates across their plans to optimize reconciliation 
payments. 
 
 
 
27 The remaining sponsors had differences that were less than $25. 
  OEI-02-08-00050  CONCERNS WITH REBATES IN THE MEDICARE PART D PROGRAM  11   
   
FFF III NNN DDD III NNN GGG SSS    
Sponsors reported that PBMs retained less than 1 percent of all rebates 
PBMs may retain a portion of the rebates they negotiate as part of their 
compensation from sponsors.   Sponsors are required to report these 
rebates in their rebate reports.  In 2008, sponsors reported that PBMs 
retained a total of $24 million, which is less than 1 percent of all 
rebates.  Overall, 39 percent of sponsors reported that their PBMs 
retained a portion of the rebates for at least one of their plans.  The 
remaining 61 percent of sponsors reported that their PBMs did not 
retain rebates. 
Rebates accounted for 98 percent of all price concessions reported by 
sponsors 
Rebates accounted for almost all of the price concessions that sponsors 
reported to CMS in 2008.  The other types of price concessions 
amounted to a net total of $142 million.  About half ($70 million) of 
these payments resulted from an arrangement in which a sponsor 
shared the financial risk with another party involved in the 
administration or delivery of the Part D benefit, such as a pharmacy.  
The remaining payments came from other sources, such as discounts 
from pharmacies for prompt reimbursement or legal settlements. 
Most sponsors did not pass the 
Sponsors commonly underestimated  
full amount of manufacturer 
rebates in their bids, which led to higher  
rebates on to beneficiaries in 
beneficiary premiums 
2008.  Sponsors pass rebates on 
to beneficiaries in two ways.  Sponsors must include an estimate in their 
bids of the rebates they expect to receive for the plan year.  These 
estimates lower the premiums that beneficiaries pay for drug coverage.  
Alternatively, sponsors can pass the rebates directly on to beneficiaries 
at the point of sale.   
Sponsors underestimated rebates in 69 percent of their bids, which led to 
higher premiums for beneficiaries in these plans 
Sponsors underestimated rebates in 69 percent of their bids for plan 
year 2008.  When sponsors underestimate rebates in their bids, 
beneficiary premiums are higher than they otherwise would be.  As a 
result, both the Government and beneficiaries overpay for the benefit.  
Although the Government recoups some of the overpayments during 
payment reconciliation, beneficiaries do not recoup any of the money 
that they paid in higher premiums.  
As shown in Table 2, 78 percent of all Part D beneficiaries were enrolled 
in plans that underestimated the amount of rebates they received.  On 
  OEI-02-08-00050  CONCERNS WITH REBATES IN THE MEDICARE PART D PROGRAM  12   
   
FF II NN DD II NN GG SS   
average, the sponsors received rebates of $7 per beneficiary per month 
more than the amounts in their bids.28  These amounts ranged from less 
than $1 to $145 per beneficiary per month.   
 
Table 2:  Amount of Rebates Sponsors Underestimated in Their Part D Bids, 2008 
Percentage of 
 
Percentage of  Part D 
Underestimated Rebates per Beneficiary per Month 
Part D Bids    Beneficiaries 
$10 and over  15%  10% 
$5 to less than $10  23%  25% 
$1 to less than $5  26%  37% 
Less than $1  6%  7% 
   Totals*  69%   78% 
Source:  OIG analysis of sponsors 2008 bids and rebate reports, 2010. 
*Sum of row percentages for each column do not equal totals because of rounding. 
In contrast, for 29 percent of bids, sponsors overestimated the rebates.  
In these cases, the beneficiary premiums were lower than they would 
have been.  On average, the sponsors received rebates of $5 per 
beneficiary per month less than the amounts in their bids.  These 
amounts ranged from less than $1 to $59 per beneficiary per month.  
About 2 percent of bids were accurate. 
The amounts of rebates included in bids may have been inaccurate 
because rebates are affected by many factors, such as beneficiary 
enrollment and drug utilization patterns.  Because these factors are 
often difficult to predict, CMS officials noted that sponsors estimates of 
rebates in their bids are not expected to exactly match the rebates they 
ultimately receive.  It is also possible, however, that some sponsors may 
deliberately underestimate their rebates to increase profits.   
Very few sponsors provided rebates at the point of sale  
Sponsors may pass rebates on to beneficiaries at the point of sale to 
reduce beneficiaries drug costs and copayments.  Sponsors did not 
 
28 Although we cannot determine the exact amount by which this increased beneficiary 
premiums, the Government provides sponsors with a subsidy equal to approximately  
75 percent of the cost of the average bid.  Beneficiaries cover the remaining portion of the 
average bid with their monthly premiums. 
  OEI-02-08-00050  CONCERNS WITH REBATES IN THE MEDICARE PART D PROGRAM  13   
   
FF II NN DD II NN GG SS   
commonly pass rebates on to beneficiaries at the point of sale in 2008.  
Of the 258 sponsors, 4 offered a total of 16 plans that provided rebates 
to beneficiaries at the point of sale.  These rebates amounted to about  
$8 million and fewer than 1 percent of all Part D beneficiaries were 
enrolled in these plans. 
 
Selected sponsors received rebates when  
Drug manufacturers provide 
they encouraged beneficiaries to use certain drugs 
rebates to encourage 
beneficiaries to use certain 
drugs over others.  The six sponsors we reviewed received two distinct 
types of rebates:  formulary rebates and market-share rebates. 
Formulary rebates were provided when sponsors formularies 
encouraged beneficiaries to use certain drugs over others, whereas 
market-share rebates were based on the total number of the rebated 
drugs that beneficiaries used compared to the total number of other 
drugs used.   
In the contracts we reviewed, most of the rebates that the selected 
sponsors received were based on a fixed percentage of wholesale 
acquisition cost (WAC).29  Sponsors received these rebates based on the 
number of units of the rebated drug dispensed to beneficiaries enrolled 
in their plans.  Sponsors received these rebates even when beneficiaries 
were responsible for the full cost of the drugs, such as when they were 
in the coverage gap.30  In addition, all of the rebates in these contracts 
were for brand-name drugs. 
All six selected sponsors received formulary rebates  
All six sponsors received rebates when their formularies and benefit 
designs encouraged beneficiaries to use certain drugs over others.  
These types of rebates, commonly known as formulary, or base, rebates 
required sponsors to include the rebated drugs on their formularies.  In 
the contracts we reviewed, these rebates ranged from 0.5 percent to  
75 percent of WAC.   
The six sponsors each received rebates based on the placement of the 
rebated drugs on their formularies.  The formularies generally had at 
 
29 WAC is the manufacturers list price for the drug for wholesalers or direct purchasers 
in the United States and does not include discounts, rebates, or other reductions in price.  
42 U.S.C.  1395w-3a(6)(B).   
30 The coverage gap is the phase of the benefit between initial coverage and catastrophic 
coverage when most beneficiaries must pay the full cost of the drugs.   
  OEI-02-08-00050  CONCERNS WITH REBATES IN THE MEDICARE PART D PROGRAM  14   
   
F I N D I N G S  
least three tiers:  one for generic drugs, one for preferred brand-name 
drugs, and one for nonpreferred brand-name drugs.  Beneficiaries paid a 
different copayment for drugs on each tier.  For example, in one plan, 
beneficiaries had a $5 copayment for generic drugs, a $25 copayment for 
preferred brand-name drugs, and a $60 copayment for nonpreferred 
brand-name drugs.  All six sponsors received rebates for including the 
drugs on the brand-name preferred tiers.   
Sponsors also often received rebates when they discouraged the use of 
competitors drugs.  As one sponsor noted, manufacturers pay more for 
less competition.  For example, several rebate agreements specified 
that a competitors drug must have a higher copayment than that of the 
rebated drug.  Other agreements required the sponsor to exclude a 
competitors drugs from its formulary altogether.  Rebates were often 
larger when fewer competitors drugs were given preference on the 
formulary.  For example, one sponsor received a 35-percent rebate when 
the drug was one of two preferred drugs in its class, but a 40-percent 
rebate when the drug was the only preferred drug in its class on the 
formulary.  
The rebates were also dependent on other aspects of their benefit 
design.  As noted earlier, sponsors can institute utilization management 
tools, such as requiring a beneficiary to seek prior authorization before 
covering certain drugs.  Sponsors often received rebates under the 
condition that the rebated drug was not subject to any utilization 
management tools. 
Finally, five sponsors received higher formulary rebates for beneficiaries 
eligible for the low-income subsidy than for other Part D beneficiaries.  
For example, one sponsor received a 20-percent rebate for drugs 
dispensed to low-income subsidy beneficiaries, compared to a 10-percent 
rebate for the same drug dispensed to other Part D beneficiaries.  
Manufacturers may have provided higher rebates for low-income 
subsidy beneficiaries as an incentive to sponsors to move these 
beneficiaries to the rebated drugs.  It may be more difficult for sponsors 
to move these beneficiaries because they are not subject to the same 
cost-sharing requirements as other Part D beneficiaries and therefore 
do not have the same incentives to select preferred drugs.  For example, 
in 2008, low-income subsidy beneficiaries paid, at most, a $5.60 
copayment for brand-name drugs and a $2.25 copayment for generic 
drugs.  They did not have a copayment differential between preferred 
and nonpreferred brand-name drugs.   
  OEI-02-08-00050  CONCERNS WITH REBATES IN THE MEDICARE PART D PROGRAM  15   
   
F I N D I N G S  
Five of the six selected sponsors also received market-share rebates 
Sponsors received market-share rebates, which were based on the total 
number of the rebated drugs that beneficiaries used compared to the 
total number of other drugs used.  Sponsors generally received these 
rebates in addition to formulary rebates.  In the contracts we reviewed, 
market-share rebates ranged from 0.5 percent to 10 percent of WAC.   
The specifics of how market-share rebates were calculated varied among 
sponsors; however, market-share rebates were generally based on the 
performance of sponsors or PBMs.  This performance was determined by 
comparing utilization of the rebated drugs to other measures, such as 
national averages.  For example, one sponsor received a market-share 
rebate when the use of a rebated drug was 4 percent higher than the 
national average for that drug.    
Four of the selected sponsors report receiving minimal rebates for drugs in 
the six protected classes   
Sponsors are required to include on each plans formulary all or 
substantially all of the drugs in six categories.  These categories are 
often referred to as the six protected classes and include  
immunosuppressant, antidepressant, antipsychotic, anticonvulsant, 
antiretroviral, and antineoplastic classes.  Four of the six selected 
sponsors raised concerns that they received either no or minimal 
rebates for the drugs in these six classes.31  For example, one sponsor 
explained that there is little incentive for drug manufacturers to offer 
rebates for these six classes of drugs because they do not need to 
compete for formulary placement.  That sponsor further stated that If 
[a rebate] is provided, its probably at a lower percentage than [the 
rebate for the drugs] that had some competition.   
As mentioned earlier, for plan year 2011, CMS is responsible for 
reassessing the drugs that sponsors will be required to include on their 
formularies.  Because sponsors report receiving fewer rebates for such 
drugs, any changes CMS makes could affect the overall cost of the  
Part D program.  
 
 
 
31 The remaining two sponsors did not comment on this issue. 
  OEI-02-08-00050  CONCERNS WITH REBATES IN THE MEDICARE PART D PROGRAM  16   
   
FFF III NNN DDD III NNN GGG SSS    
Selected sponsors had complex contractual  CMS holds sponsors ultimately 
relationships with PBMs that sometimes lacked  responsible for accurately 
reporting rebates and for ensuring 
transparency 
that their PBMs comply with CMS 
requirements.32   The six selected sponsors commonly had complex 
relationships with their PBMs, and in some cases, these relationships 
lacked transparency.  This lack of transparency raises concerns that 
sponsors may not always have enough information to oversee the 
services and information provided by PBMs.  
Contractual relationships between selected sponsors and PBMs were varied 
and complex 
All of the six selected sponsors had contracts with at least one PBM to 
negotiate with drug manufacturers for rebates for their plans.  In these 
cases, the PBMs, not the sponsors, entered into contracts with the 
manufacturers and collected the rebates.  In addition, all six sponsors 
relied on their PBMs to provide the aggregate data on rebates and other 
price concessions that sponsors are required to report to CMS.  
Sponsors had a variety of complex contractual relationships with the 
PBMs.  Two sponsors contracted with more than one PBM.  In addition, 
some PBMs were owned by the same parent company as the sponsor.  
Some PBMs were also sponsors themselves and offered their own Part D 
plans.  For example, one sponsor owned a PBM that served some of its 
own Part D plans as well as other sponsors plans.  This sponsor also 
contracted with another PBM that had its own Part D plan.   
There was limited transparency between the selected sponsors and their 
PBMs related to rebates 
Five sponsors had limited information about the rebate contracts and 
the rebate amounts negotiated by their PBMs.  One PBM reported that 
it does not share the manufacturer rebate contracts with its sponsors 
because they contain confidential information and there is a chance that 
the sponsor may one day become a PBM itself.  Another PBM 
specifically stated that the sponsor would not be permitted to copy or 
retain any portion of the contract.  As a result of these practices, most 
 
32 CMSs Prescription Drug Benefit Manual states that sponsors are ultimately 
responsible for complying with all statutory, regulatory, and other requirements.  They 
must also ensure that their subcontractors, including their PBMs, are in compliance with 
all applicable laws, rules, and regulations with respect to any Part D delegated 
responsibilities.  CMS, Prescription Drug Benefit Manual, ch. 9,  40.1. 
  OEI-02-08-00050  CONCERNS WITH REBATES IN THE MEDICARE PART D PROGRAM  17   
   
F I N D I N G S  
of the selected sponsors were unaware of all of the contract terms that 
determine the rebates they receive from drug manufacturers.  
Several of the sponsors also had limited information about the rebate 
amounts they actually received for each drug.  As one sponsor 
explained, its PBM provided aggregate information for all the rebates 
associated with each Part D plan, rather than by drug name.  As a 
result, this sponsor did not know the amount of rebates it received for 
each drug.  
Several sponsors and PBMs further noted that the PBM industry is 
extremely competitive and, as a result, information about a PBMs 
business practices, including the rebate contracts and the negotiated 
rebate amounts, is highly confidential.  In fact, the PBMs in our study 
were, in some cases, unwilling to discuss details about their business 
practices in front of the sponsor.   
Selected sponsors relied primarily on audits to verify the rebate amounts, 
and these audits were sometimes limited 
The selected sponsors relied primarily on audits to verify that they 
received the appropriate amount of rebates and that the rebate data 
they reported to CMS were accurate.33  In some cases, the scope of what 
the sponsor could audit was restricted.  According to one sponsors 
contract with its PBM, the sponsor could audit a limited number of its 
rebate agreements for the two quarters immediately preceding the 
audit.  However, the contract also stated that the manufacturer had the 
right to deny the sponsor access to rebate agreements requested for the 
audit.  Another PBM contract stated that the sponsor could review only 
a sample of rebate agreements.  A third sponsors contract with its PBM 
stated that the sponsor had the right to audit only certain parts of the 
rebate agreements.  In addition, two sponsors were required to use a 
third-party auditing firm to perform these audits.   
Selected sponsors reported that their PBMs collected fees from drug 
manufacturers that were not always passed on to the Part D program 
Five of the six selected sponsors reported that their PBMs received fees 
from drug manufacturers, in addition to the fees that sponsors paid 
PBMs for negotiating rebates.34  These fees were structured like rebates 
 
33 Several sponsors also explained that they conducted a broad-level data analysis to 
roughly check the amount of rebates that they should have received. 
34 The sixth sponsor reported that its PBM did not receive these fees. 
  OEI-02-08-00050  CONCERNS WITH REBATES IN THE MEDICARE PART D PROGRAM  18   
   
FF II NN DD II NN GG SS   
in that they were generally based on a fixed percentage of WAC.  
According to the contracts we reviewed, these fees were for services that 
the PBM provided to the manufacturers, such as negotiating rebates, 
calculating rebate amounts, and distributing rebates to sponsors. 
The PBMs handled these fees somewhat differently.  For example, two 
of the PBMs considered these fees to be rebates and provided them to 
the sponsors.  As a result, these sponsors reported them to CMS and 
passed them on to the Government, thereby reducing the overall cost of 
the Part D program.   
In the other three cases, the PBMs considered these fees to be for 
services they provided to the manufacturers and therefore they did not 
pass them on to the sponsors.  As a result, the sponsors did not report 
the fees to CMS and therefore they were not passed on to the program.  
Specifically, the PBMs considered these fees to be bona fide service fees, 
which CMS does not consider price concessions if they are at fair market 
value.  The contracts we reviewed between the sponsors and the PBMs 
had only limited information about these fees.  Because sponsors may 
not always be able to verify whether these fees should be considered 
rebates or bona fide service fees, they may be inaccurately reporting this 
information to CMS.  
 
  OEI-02-08-00050  CONCERNS WITH REBATES IN THE MEDICARE PART D PROGRAM  19   
   
 RRE EC CO OM MM ME EN ND DA AT TI OI ON NS S   
 
Our report found that drug manufacturer rebates totaled $6.5 billion in 
2008, representing about 10 percent of Part D drug costs.  Because of 
the size of these rebates, it is vital that rebates be reported accurately 
and that the Government and beneficiaries receive the full benefit of 
these rebates.  
We identified several concerns about these rebates.  We found that some 
sponsors reported large differences in rebates across their plans.  We 
further found that most beneficiaries did not receive the full benefit of 
rebates.  Notably, sponsors underestimated rebates in  
69 percent of their bids, resulting in beneficiary premiums that were 
higher than they otherwise would have been.  We also found that 
contractual relationships between selected sponsors and their PBMs 
sometimes lacked transparency and that sponsors sometimes lacked the 
ability to oversee the services and information provided by PBMs.  
Finally, we found that some sponsors passed the fees that their PBMs 
received from manufacturers on to the program, while others did not.  
Based on these findings, we recommend that CMS: 
Take steps to ensure that sponsors more accurately include their expected 
rebates in their bids 
Beneficiaries benefit from rebates that are included in the bids; 
therefore, it is essential that sponsors report all of the rebates they 
expect to receive.  After the close of each plan year, CMS should 
compare the actual rebates that sponsors reported to the rebates in 
sponsors bids.  CMS should work with the sponsors that have 
particularly large differences to ensure that these differences do not 
occur in the future.  CMS should also consider targeting these sponsors 
in its financial audits.   
Require sponsors to use methods CMS deems reasonable to allocate 
rebates across plans 
The methods sponsors use to allocate rebates across plans may affect 
the amount that the Government pays for the Part D program.  In its 
guidance for reporting 2009 rebates, CMS provides a list of allocation 
methods it considers reasonable, such as allocating rebates based on 
drug utilization or spending.  CMS should make any necessary changes 
to this list.  It should require sponsors to either use one of the methods 
it determines to be reasonable or submit documentation proving that an 
alternative method is reasonable.  
  OEI-02-08-00050  CONCERNS WITH REBATES IN THE MEDICARE PART D PROGRAM  20   
   
RR EE CC OO MM MM EE NN DD AA TT II OO NN SS   
Ensure that sponsors have sufficient audit rights and access to rebate 
information  
Sponsors are ultimately responsible for accurately reporting their 
rebates to CMS.  CMS should ensure that sponsors have sufficient 
information to accurately report rebates.  To do this, CMS could require 
sponsors to have stronger provisions in their contracts related to their 
audit rights and access to rebate information.  CMS could also provide 
more detailed guidance to sponsors about how they should monitor PBM 
rebate information. 
Ensure that sponsors appropriately report the fees that PBMs collect from 
manufacturers 
CMS should work with sponsors to gain a better understanding of the 
circumstances under which some sponsors are reporting these fees as 
rebates and others are not.  CMS should clarify when these fees should 
be reported as rebates.  In addition, beginning for plan year 2009, CMS 
required sponsors to report all payments that meet the definition of 
bona fide service fees, including those that the PBM retains and does 
not share with the sponsor.  CMS should use this information to 
monitor the fees and ensure that they were reported appropriately.  It 
should also use the informationand perhaps target certain sponsors to 
auditto assess whether these fees should actually be considered 
rebates and therefore should be taken into account in reconciliation.    
AGENCY COMMENTS AND OFFICE OF INSPECTOR GENERAL 
RESPONSE 
CMS concurred with one of our recommendations in the draft report and 
partially concurred with another.  CMS did not concur with the 
remaining two recommendations.   
CMS concurred with our first recommendation, to ensure that sponsors 
more accurately include rebates in their bids.  CMS stated that it will 
consider adding to its bid review a comparison of the rebates sponsors 
actually receive and include in their rebate reports to the rebates they 
include in their bids.  CMS further stated that it is more effective to 
review rebate data before the bids are approved than to audit the data 
after bids have been approved, noting that this helps ensure that 
beneficiaries and the Government receive the benefit of the rebates in 
beneficiary premiums and the prospective Part D payments.   
CMS did not concur with our second recommendation, to require 
sponsors to use certain methods to allocate rebates across plans.  CMS 
  OEI-02-08-00050  CONCERNS WITH REBATES IN THE MEDICARE PART D PROGRAM  21   
   
R E C O M M E N D A T I O N S  
stated that it currently requires sponsors to use a reasonable allocation 
methodology that reflects differences in utilization and spending.  CMS 
stated that sponsors should be allowed to use a methodology other than 
those enumerated by CMS.  It noted that it will continue to collect and 
review information from sponsors regarding their methods for reporting 
rebates across plans and will consider whether it is appropriate to 
provide additional guidance.   
Our findings show that sponsors may be inappropriately allocating 
rebates across plans.  Because this may result in a loss to the 
Government, we continue to recommend that CMS require sponsors to 
use allocation methods it deems reasonable.  This would enable CMS to 
better monitor how sponsors are reporting rebates and would thereby 
enable CMS to better safeguard the Part D program.  In response to 
CMSs comments, in our final report we reworded our recommendation 
and added a sentence recommending that if sponsors choose an 
alternative method, they must submit documentation proving that it is 
reasonable.  We believe that this would allow sponsors some flexibility 
but at the same time enable CMS to ensure that the methods are in fact 
reasonable. 
CMS did not concur with our third recommendation, to require sponsors 
to have sufficient audit rights and access to rebate information.  CMS 
stated that it has taken steps to promote transparency and to make 
sponsors responsible for the accuracy of the rebate information they 
report to CMS.  It further noted that it believes the current regulatory 
framework strikes the appropriate balance to encourage sponsors to 
negotiate sufficient disclosure of information from their PBMs, while 
recognizing the PBMs view that certain information is highly 
confidential.  In addition, CMS commented that it believes the 
Governments access to rebate information is more crucial to the 
integrity of the Part D program and that it has already imposed 
requirements on sponsors to address the Governments need for 
transparency.   
We are aware of the current regulatory framework and the importance 
of balancing the interests of sponsors and PBMs.  However, this report 
shows that some Part D sponsors have limited rights to audit their 
PBMs and limited access to information about their rebates.  Without 
adequate information, sponsors cannot fulfill their responsibility to 
ensure the accuracy of the rebate information they report to CMS.  In 
response to CMSs comments, we modified our recommendation and 
  OEI-02-08-00050  CONCERNS WITH REBATES IN THE MEDICARE PART D PROGRAM  22   
   
R E C O M M E N D A T I O N S  
offered two ways for CMS to ensure that sponsors have sufficient audit 
rights and access to rebate information.  Specifically, CMS could require 
sponsors to have stronger provisions in their contracts related to their 
audit rights and access to rebate information.  CMS could also provide 
more detailed guidance to sponsors about how they should monitor PBM 
rebate information.  Finally, while we agree with CMS that Government 
access to rebate information is crucial to the integrity of the program, 
we stress that sponsors having sufficient audit rights and access to 
rebate information is also essential to safeguarding the program. 
CMS partially concurred with our fourth recommendation, to ensure 
that sponsors appropriately report the fees that PBMs collect from 
manufacturers.  CMS noted that it does not concur that more specificity 
is required in the definition of bona fide service fees.  However, CMS 
stated that it plans to continue to collect information from sponsors 
regarding the bona fide service fees received by their PBMs and that it 
uses this information to ensure that fees are appropriately reported to 
CMS.  CMS stated that this information will also be used to provide 
additional guidance to Part D sponsors regarding bona fide service fees 
as appropriate.  However, this report shows that sponsors are reporting 
these fees differently.  While CMS may not need to change the definition 
of bona fide service fees, it may need to provide additional guidance or 
clarification to sponsors about when sponsors need to report these fees 
as rebates, which thereby reduce the amount the Government pays for 
the program.   
We also made technical corrections to the report based on CMSs 
comments.  For the full text of CMSs comments, see Appendix A. 
 
  OEI-02-08-00050  CONCERNS WITH REBATES IN THE MEDICARE PART D PROGRAM  23   
   
A P P E N D I X   ~   A  
 A P P E N D I X ~ A  
Centers for Medicare  & Medicaid Services Comments 
(#
/"""0<$-.,
DEPAKlMENT OF HEALTH. HUMAN SERVICES Centers forMedicare&MedicaidServices
Administrator
Washington, DC 20201
DEC16 20W
DATE:
TO: Daniel R.Levinson
Inspector General
FROM: Donald M. Berwick, MD
Administrator
SUBJECT: Office of Inspector General (OIG) Draft Report: Concerns with Rebates inthe
Medicare Part DProgram (OEI-02-08-00050)
Thank you forthe opportunity toreview and comment onthis OIG draft report, which evaluates
rebates inthe.Medicare Part DProgram. The objective ofthe study was toreview the rebates
received by part Dsponsors and reported tothe Centers forMedicare &Medicaid Services
(CMS) inorder todetermine thefollowing:
 The extent towhich allPart Dsponsors received rebates in 2008;
 The extent towhich all Part Dsponsors passed rebates ontobeneficiaries;
 The nature ofthe rebates received byselected sponsors; and
 The nattrre of selected sponsors' contractual relationships with pharmacy benefit
managers (PBMs).
The OIG made several recommendations to.ensure that rebates arereported accurately such that
the Government andbeneficiaries receive the full benefit ofthese rebates. Currently, CMS
conducts s~veralEevi~Vlsof therebate andother price concessions data reported byPart D
sponsors toensure that these data are reported accurately toCMS. Specifically, CMS evaluates
therebates amounts projected inthePart Dbids, conducts reasonableness reviews on the direct
and indirect remuneration (DIR) data prior toinclusion inPart Dpayment reconciliation, and
validates the DIR data during thePart Dfinancial audits. However, given the impact ofthese
data onthe costs incurred by beneficiaries and the Government, CMS understands the OIG's
concerns. We look forward tocontinuing towork with the OIG tostrengthen the Medicare Part
DProgram. Below isCMS' response tothe OIG's recommendations.
OIGRecommendation
CMS Should Take Steps toEnsure That Sponsors More Accurately Include Their Expected
Rebates inTheir Bids.
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 A C K N O W L E D G M E N T S  
   
This report was prepared under the direction of Jodi Nudelman, 
Regional Inspector General for Evaluation and Inspections in the New 
York regional office, and Meridith Seife, Deputy Regional Inspector 
General.   
Miriam Anderson served as the team leader for this study.  Other 
 
principal Office of Evaluation and Inspections staff from the New York 
regional office who contributed to this report include Jenell Clarke, 
Levita Lowe, and David Rudich; central office staff who contributed 
include Kevin Farber and Rita Wurm. 
 
  OEI-02-08-00050  CONCERNS WITH REBATES IN THE MEDICARE PART D PROGRAM  28   
 
Office of Inspector General 
http://oig.hhs.gov 
 
The mission of the Office of Inspector General (OIG), as mandated by Public Law 95-452, as 
amended, is to protect the integrity of the Department of Health and Human Services 
(HHS) programs, as well as the health and welfare of beneficiaries served by those 
programs.  This statutory mission is carried out through a nationwide network of audits, 
investigations, and inspections conducted by the following operating components: 
Office of Audit Services 
The Office of Audit Services (OAS) provides auditing services for HHS, either by conducting 
audits with its own audit resources or by overseeing audit work done by others.  Audits 
examine the performance of HHS programs and/or its grantees and contractors in carrying 
out their respective responsibilities and are intended to provide independent assessments of 
HHS programs and operations.  These assessments help reduce waste, abuse, and 
mismanagement and promote economy and efficiency throughout HHS. 
Office of Evaluation and Inspections 
The Office of Evaluation and Inspections (OEI) conducts national evaluations to provide 
HHS, Congress, and the public with timely, useful, and reliable information on significant 
issues.  These evaluations focus on preventing fraud, waste, or abuse and promoting 
economy, efficiency, and effectiveness of departmental programs.  To promote impact, OEI 
reports also present practical recommendations for improving program operations.  
Office of Investigations 
The Office of Investigations (OI) conducts criminal, civil, and administrative investigations 
of fraud and misconduct related to HHS programs, operations, and beneficiaries.  With 
investigators working in all 50 States and the District of Columbia, OI utilizes its resources 
by actively coordinating with the Department of Justice and other Federal, State, and local 
law enforcement authorities.  The investigative efforts of OI often lead to criminal 
convictions, administrative sanctions, and/or civil monetary penalties. 
Office of Counsel to the Inspector General 
The Office of Counsel to the Inspector General (OCIG) provides general legal services to 
OIG, rendering advice and opinions on HHS programs and operations and providing all 
legal support for OIGs internal operations.  OCIG represents OIG in all civil and 
administrative fraud and abuse cases involving HHS programs, including False Claims Act, 
program exclusion, and civil monetary penalty cases.  In connection with these cases, OCIG 
also negotiates and monitors corporate integrity agreements.  OCIG renders advisory 
opinions, issues compliance program guidance, publishes fraud alerts, and provides other 
guidance to the health care industry concerning the anti-kickback statute and other OIG 
enforcement authorities.