Department of Health and Human Services 
OFFICE OF 
 
 
INSPECTOR GENERAL 
 
 
 
 
 
 
H -P D A
IGH RICE  RUGS  RE 
 
I F
NCREASING  EDERAL 
 
P   M
AYMENTS FOR  EDICARE 
 
P  D C
ART    ATASTROPHIC 
 
  C  
OVERAGE
 
   
 
 
Daniel R. Levinson 
Inspector General 
 
January 2017 
OEI-02-16-00270   
Report in Brief 
 
January 2017 
 OEI-02-16-00270 
 
High-Price Drugs Are Increasing Federal Payments for 
Why OIG Did This Review  
Members of Congress and others  Medicare Part D Catastrophic Coverage 
have raised concerns about the high 
prices of certain drugs and the impact  What OIG Found 
Federal Payments for Catastrophic Coverage (in Billions) 
these high prices have on Medicare   
Federal payments for  $33.2
beneficiaries and the health care 
system.   catastrophic coverage    $27.2
exceeded $33 billion in 
 
An important part of the Medicare  2015, which is more  $19.2
than triple the amount  $15.5
Part D benefit is catastrophic  $13.7
coverage, which beneficiaries enter  paid in 2010.  Spending  $10.8
for high-price drugs 
when their out-of-pocket costs 
contributed significantly 
exceed a certain threshold.  In 
to this growth.  By 2015, 
catastrophic coverage, most 
high-price drugs were 
beneficiaries pay a 5-percent  2010 2011 2012 2013 2014 2015
responsible for almost 
coinsurance for drugs, while the 
two-thirds of the total  Source:  OIG analysis of CMS Payment Reconciliation System data, 2016. 
Federal Government pays the vast 
drug spending in catastrophic coverage.  This is a significant increase from 
majority of the remaining costs.       
2010, when high-price drugs were responsible for one-third of the spending. 
 
Understanding the effect that high  Moreover, 10 high-price drugs accounted for nearly one-third of all drug 
drug prices have on spending in  spending for catastrophic coverage in 2015.  Most of these drugs cost 
catastrophic coverage is crucial.  In  thousands of dollars per month.  They treat conditions such as hepatitis C, 
catastrophic coverage, beneficiaries  cancer, and multiple sclerosis.  The average prices for each of these drugs 
out-of-pocket costs are not capped,  ranged from $1,200 to almost $34,000 per month, leading to high out-of-
and the Federal Governments share  pocket costs for some beneficiaries in catastrophic coverage. 
of drug spending is the highest.   
  What OIG Concludes    The dramatic growth in Federal 
How OIG Did This Review  Securing the future of the Part D  payments for catastrophic coverage 
We analyzed data from the Centers for  program while ensuring  and the underlying issue of high drug 
prices must be analyzed and 
Medicare & Medicaid Services to  beneficiaries have access to 
addressed to secure the future of the 
determine the amount that the Federal  needed drugs is a complex issue 
Part D program.  The issue of high-
Government spent for catastrophic 
that calls for a multifaceted 
price drugs is not exclusive to 
coverage through the reinsurance 
approach.  OIG remains 
catastrophic coverage; it affects the 
subsidy.  We also analyzed the Part D 
committed to examining these 
entire Part D benefit and can lead to 
Prescription Drug Event records to 
issues.  Recently, CMS has taken  higher costs for all beneficiaries.   
identify specific drugs dispensed in 
steps in response to rising drug 
catastrophic coverage.   
prices.  It published information about certain drugs with substantial increases 
in price.  CMS also stated that action is necessary to address rising drug costs and asked the industry to partner with the 
agency to find solutions that allow for both innovation and affordability.  Moving forward, CMS will likely need 
additional tools to address these issues.  Potential tools have been discussed by experts and include restructuring the 
Part D benefit so that sponsors have more incentives and opportunities to lower costs, creating more transparency 
about drug pricing, promoting value-based options, and revising the law to allow the Federal Government to negotiate 
prices for certain drugs.  CMS should carefully assess these and other options and should, working with Congress, make 
any needed changes to the Part D program.   
 
Full report can be found at http://oig.hhs.gov/oei/reports/oei-02-16-00270.asp   
   
 
TABLE OF CONTENTS 
 
Objectives ....................................................................................................1 
Background ..................................................................................................1 
Methodology ................................................................................................4 
Findings........................................................................................................6 
Federal payments for Part D catastrophic coverage exceeded  
$33 billion in 2015, which is more than three times the amount 
paid in 2010......................................................................................6 
Spending for high-price drugs contributed significantly to the 
growth in Federal payments for Part D catastrophic coverage ........7 
Ten high-price drugs accounted for nearly one-third of all drug 
spending for catastrophic coverage in 2015.....................................8 
Some beneficiaries in catastrophic coverage face high out-of-
pocket costs ....................................................................................10 
Conclusion .................................................................................................12 
Appendix A:  The Standard Part D Benefit, 2015 .....................................14 
Appendix B:  Detailed Methodology .........................................................15 
Acknowledgments......................................................................................18 
   
   
   
OBJECTIVES 
1.  To describe the growth in Federal payments for Medicare Part D 
catastrophic coverage. 
2.  To determine which drugs account for the highest spending in 
catastrophic coverage. 
BACKGROUND  
Recently, Members of Congress and others have raised concerns about the 
high prices of certain drugs, such as the new drugs used to treat hepatitis 
C, and the impact these high prices have on patients and the health care 
system.1  Medicare Part D and its beneficiaries are directly affected by 
high drug prices.  In 2015, more than 41 million beneficiaries were 
enrolled in Part D.2  
An important part of the Part D benefit is catastrophic coverage, which is 
designed to protect beneficiaries from high out-of-pocket costs.  In 
catastrophic coverage, beneficiaries typically pay a 5-percent coinsurance 
for drugs, while the Federal Government pays the vast majority of the 
remaining costs.3  Beneficiaries enter catastrophic coverage when their 
out-of-pocket costs for the year exceed a certain threshold.   
Understanding the effect that high drug prices have on spending in 
catastrophic coverage is crucial.  Catastrophic coverage is the stage of the 
benefit in which the Federal Governments share of drug costs is the 
highest.  Also, the beneficiaries who reach this stage may carry a heavy 
financial burden; they have medical conditions that require high levels of 
drug spending and their out-of-pocket costs are not capped.  Part D does 
not have an annual or lifetime maximum for beneficiaries out-of-pocket 
costs.  
Catastrophic Coverage in Part D 
Part D is an optional prescription drug benefit for Medicare beneficiaries 
that is provided by private insurance companiesknown as Part D 
                        ____________________________________________________________ 
1 For example, see United States Senate Committee on Finance. The Price of Sovaldi and 
Its Impact on the U.S. Health Care System, December 2015.  Also see, United States 
House of Representative, Committee on Oversight & Government Reform. Developments 
in the Prescription Drug Market, Feb. 4, 2016. 114th Cong. 2nd sess. United States Senate 
Special Committee on Aging, Sudden Price Spikes in Off-Patent Drugs:  Perspectives 
from the Front Lines, December 9, 2015. 114th Cong. 1st sess.  
2 The Boards of Trustees, Federal Hospital Insurance and Federal Supplementary Medical 
Insurance Trust Funds, 2016 Annual Report of the Boards of Trustees of the Federal 
Hospital Insurance and Federal Supplementary Medicare Insurance Trust Funds, p. 186.  
3 The Part D sponsor is responsible for 15 percent of the costs. 
 
High-Price Drugs Are Increasing Federal Payments for Medicare Part D Catastrophic Coverage (OEI-02-16-00270)  1 
   
   
sponsorsunder contract with the Centers for Medicare & Medicaid 
Services (CMS).4  The standard Part D drug benefit is divided into stages, 
with beneficiaries moving through the stages as their drug costs increase.5 
The Governments and the beneficiarys share of the drug costs differs in 
each stage.  The last stage of the benefit is catastrophic coverage.    
Beneficiaries enter this stage when their out-of-pocket costs for the year 
exceed a certain threshold, which in 2015 was $4,700.  In catastrophic 
coverage, a beneficiary typically pays a coinsurance that is 5 percent of the 
price, while the sponsor is responsible for 15 percent of the price and the 
Federal Government pays the remainder, after it takes rebates and other 
price concessions into account.6   See Appendix A for more detailed 
information about the stages of the benefit and catastrophic coverage. 
Federal Payments for Catastrophic Coverage Through the 
Reinsurance Subsidy 
The Federal Government pays for catastrophic coverage primarily through 
the reinsurance subsidy.  For this subsidy, CMS prospectively pays 
sponsors based on estimated costs, and then reconciles these payments 
after the end of the year.   
Before the beginning of the plan year, sponsors are required to submit a bid 
for each plan they intend to offer.  The bid contains an estimate of the 
revenue per beneficiary that the sponsor would need to provide the basic 
benefit, and the bid includes an estimate of the sponsors catastrophic drug 
costs.  CMS uses the bid to set beneficiary premiums.  It also uses the bids to 
determine the monthly prospective payments it pays each sponsor for the 
reinsurance subsidy. 
                        ____________________________________________________________ 
4 The Medicare Prescription Drug, Improvement, and Modernization Act of 2003, P.L. 
No. 108-173, Social Security Act  1860D-1(a), 42 U.S.C.  1395w-101(a).  Also see, 42 
U.S.C.  1395w-112(b)(1). 
5 The stages of the standard benefit include the deductible, initial coverage, coverage gap, 
and catastrophic coverage.  Part D sponsors are required to offer a basic benefit that is 
either the standard benefit or an equivalent alternative.  Sponsors may also offer 
enhanced plans, which cover more than the standard benefit.  For example, some 
enhanced plans do not have a deductible.  For more information on the standard benefit, 
see Appendix A.  CMS, Medicare Prescription Drug Benefit Manual, Chapter 5, Sections 
20.3.1, 20.3.2 and 20.4, September 2011. 
6 The price represents the amount paid to the pharmacy at the point of sale by all payers.  
It is negotiated between the sponsors and their network pharmacies for the drug, or is the 
usual and customary price paid to out-of-network pharmacies.  See 42 C.F.R.  423.100.  
In catastrophic coverage, the beneficiary is responsible for paying the greater of the 5-
percent coinsurance or a set copayment for generic and brand-name drugs.  For 2015, the 
copayment amounts were $2.65 for generic and $6.60 for brand-name drugs.  See CMS, 
Announcement of Calendar Year (CY) 2015 Medicare Advantage Capitation Rates and 
Medicare Advantage and Part D Payment Policies and Final Call Letter, April 7, 2014. 
 
High-Price Drugs Are Increasing Federal Payments for Medicare Part D Catastrophic Coverage (OEI-02-16-00270)  2 
   
   
Approximately 9 months after the close of each plan year, CMS reconciles 
the prospective payments made to sponsors for the reinsurance subsidy with 
the actual costs incurred by the sponsors for catastrophic coverage.  To 
determine the total reinsurance payment amount for each plan, CMS 
calculates the total drug costs for the beneficiaries in catastrophic coverage 
and adjusts this amount to account for manufacturer rebates and other price 
concessions that the sponsor reports receiving during the year.  The total 
reinsurance amount paid to sponsors is 80 percent of the adjusted amount.  
In this report, we refer to the total reinsurance amount paid as Federal 
payments for catastrophic coverage. 
There are two other subsidies in the Part D program.  The direct subsidy 
covers the basic benefit.7  The low-income subsidy covers some or all of 
the premiums and coinsurance for certain low-income beneficiaries. 8  
These subsidies are not the focus of this report. 
Related Public Discussion 
Recently, growing public discussion has focused on increases in drug 
prices.  Experts, policy makers, and others have offered various policy 
options to address concerns.  Notably, the Medicare Payment Advisory 
Commission, Kaiser Family Foundation, and Congressional Budget Office 
have provided analyses about these different options.  These options 
include restructuring the Part D benefit so that sponsors have more 
incentives and opportunities to lower costs, creating more transparency 
about drug pricing, promoting value-based options, and revising the law to 
allow the Government to negotiate prices for certain drugs.9 
                        ____________________________________________________________ 
7 The Federal Government shares the risk with sponsors to provide the basic benefit.  If at 
the end of the year, sponsors have overall profits or losses that exceed certain thresholds,   
they share these profits or losses with the Federal Government.  See 42 C.F.R.  423.336.   
8 For more information about these subsidies, see 42 C.F.R.  423.315.   
9 For more information about proposals related to restructuring the Part D benefit, see 
MedPAC, June 2016 Report to the Congress:  Medicare and the Health Care Delivery 
System, Chapter 6:  Improving Medicare Part D, June 2016.  For information about 
drug price transparency, see Fair Accountability and Innovative Research Drug Pricing 
Act of 2016, H.R. 6043 114th Congress, 2016.  Also see, United States Senate Committee 
on Finance, The Price of Sovaldi and Its Impact on the U.S. Health Care System, 
December 2015.  For more information about value-based purchasing, see HHS 
Pharmaceutical Forum:  Innovation, Access, Affordability and Better Health, November 
20, 2015.  Accessed online at http://www.hhs.gov/hhs-pharmaceutical-forum/# on 
September 20, 2016.  Also see, MedPAC, June 2015 Report to the Congress:  Medicare 
and the Health Care Delivery System, Chapter 4:  Value-based Incentives for Managing 
Part B Drug Use, June 2015.  For information about Government price negotiation, see 
Douglas Holtz-Eakin, Director, CBO, Letter to Senator Ron Wyden, March 3, 2004.  
Also see, Richard G. Frank, Issue Brief:  Prescription Drug Procurement and the Federal 
Budget, Kaiser Family Foundation, May 2012.   
 
High-Price Drugs Are Increasing Federal Payments for Medicare Part D Catastrophic Coverage (OEI-02-16-00270)  3 
   
   
METHODOLOGY 
Analysis of Federal Payments for Catastrophic Coverage 
We analyzed data from CMSs Payment Reconciliation System (PRS) to 
determine the actual amount that the Federal Government paid each 
sponsor for catastrophic coverage through the reinsurance subsidy.  We 
analyzed the data by plan from 2006 to 2015 but focused our analysis on 
the 6 most recent years.  As stated earlier in this report, we refer to the 
total reinsurance subsidy payments as the Federal payments for 
catastrophic coverage.  These payments represent the actual amount the 
Federal Government paid for catastrophic coverage after rebates and other 
price concessions are taken into account.   
Analysis of Total Drug Spending for Catastrophic Coverage 
To better understand the growth in Federal payments for catastrophic 
coverage and which drugs contributed to this growth, we analyzed the Part 
D prescription drug event (PDE) records from 2010 to 2015.  We used the 
PDE records because they contain information on the specific drugs that 
were dispensed in catastrophic coverage.  Drug-level data are not available 
in the PRS data.   
The PDE records contain the total amount paid to the pharmacy by all 
payersincluding the beneficiary, Government, and sponsorfor each 
drug.  We refer to the total amount paid for all drugs in catastrophic 
coverage as total drug spending; it is different from the payment data in 
the PRS which contain information on the Federal Governments share of 
drug spending in catastrophic coverage, after rebates and other price 
concessions are taken into account.    
We analyzed the PDE records to identify trends in total drug spending for 
catastrophic coverage.  To determine this amount, we summed four fields 
on the PDE recordsingredient cost, dispensing fee, sale tax, and vaccine 
administration fee.  This amount is the point-of-sale price that is 
negotiated between the sponsors and their network pharmacies or is the 
usual and customary price paid to out-of-network pharmacies.  It is not 
adjusted for manufacturer rebates or other price concessions that the 
sponsors may receive.   
Using the same fields in the PDE records, we then determined the average 
price per month for each drug, by drug name.  We identified the drugs that 
had an average price of more than $1,000 per month.  For the purposes of 
 
High-Price Drugs Are Increasing Federal Payments for Medicare Part D Catastrophic Coverage (OEI-02-16-00270)  4 
   
   
this report, we refer to these drugs as high-price drugs. 10  Next, we 
analyzed trends in spending for high-price drugs.  We identified the high-
price drugs that had the highest total spending in catastrophic coverage.  
See Appendix B for more detailed information about the methodology. 
Limitations 
This study focuses on Federal payments made for catastrophic coverage 
through the reinsurance subsidy.  It does not include the additional 
amounts the Federal Government contributes toward catastrophic 
coverage through the direct or low-income subsidies.  In addition, we did 
not assess whether Part D drug spending affected spending in other parts 
of Medicare.  
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. 
 
                        ____________________________________________________________ 
10 CMS considers drugs that exceed $600 per month to be eligible to be placed on a 
specialty tier of a sponsors formulary.  Sponsors often have different tiers on their 
formulary, and each tier has a different copayment or coinsurance.  Specialty tiers 
typically have the highest copayments or coinsurance. 
 
High-Price Drugs Are Increasing Federal Payments for Medicare Part D Catastrophic Coverage (OEI-02-16-00270)  5 
   
   
FINDINGS 
Federal payments for Part D catastrophic coverage 
exceeded $33 billion in 2015, which is more than 
three times the amount paid in 2010 
Federal payments for Part D catastrophic coverage have grown 
substantially in recent years.  From 2010 to 2015, Federal payments for 
catastrophic coverage more than tripled, growing from $10.8 billion to 
$33.2 billion.11  These payments represent 80 percent of total drug 
spending in catastrophic coverage after rebates and other price 
concessions are taken into account.   
The substantial increase in these payments in recent years 208 percent, 
or $22.4 billionis significantly higher than the growth in earlier years of 
the program.12  From 2006 to 2010, Federal payments for catastrophic 
coverage grew 85 percent, or $5 billion.   
The largest annual increases occurred in 2014 and 2015, first jumping  
$8 billion and then another $6.1 billion (see Figure 1).  
 
Figure 1:  Federal Payments for Medicare Part D Catastrophic Coverage, 
20062015 
$33.2
$27.2
s
n
o
Billi $19.2
n 
s i $15.5
nt $13.7
e
m $10.8
ay $8.8 $9.8
P $7.5
$5.8
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
 
    . 
Source:  OIG analysis of CMS Payment Reconciliation System data, 2016
                        ____________________________________________________________ 
11 For the purposes of this report, we refer to the reinsurance subsidy as the Federal 
payments for catastrophic coverage.  Most of the Federal Governments contributions 
toward catastrophic coverage is through the reinsurance subsidy.  In 2015, the Federal 
Government paid about $1.6 billion in coinsurance for low-income beneficiaries in 
catastrophic coverage.  We did not calculate the amount the direct subsidy contributed to 
catastrophic coverage. 
12 Note that these numbers and others presented in this report are rounded.  Because our 
calculations are based on unrounded numbers, they cannot always be recreated from the 
numbers presented in the report. 
 
High-Price Drugs Are Increasing Federal Payments for Medicare Part D Catastrophic Coverage (OEI-02-16-00270)  6 
   
   
Federal payments for catastrophic coverage became the most expensive 
part of the Part D program in 2014.  By 2015, Federal payments for 
catastrophic coverage accounted for 42 percent of Federal payments for 
Part D. 13  Prior to 2014, the most expensive part of the Part D program 
was either the direct or low-income subsidy.  
Spending for high-price drugs contributed 
significantly to the growth in Federal payments for 
Part D catastrophic coverage 
Federal payments for Part D catastrophic coverage are 80 percent of total 
drug spending after rebates and other price concessions are taken into 
account.  Drug spending is the amount paid for a drug to the pharmacy by 
all payersincluding the beneficiary, Government, and sponsor.14  Drug 
spending for high-price drugs has grown considerably and has contributed 
to the increase in Federal payments for catastrophic coverage.  High-price 
drugs are defined as those with an average price of more than $1,000 per 
month.  
Drug spending for high-price drugs in catastrophic coverage increased 
almost sevenfold from 2010 to 2015.  It rose from $5 billion to  
$33.4 billion, with the biggest increase occurring in 2015. 
By 2015, high-price drugs were responsible for almost two-thirds of the 
total drug spending in catastrophic coverage.  This is a significant increase 
from 2010, when high-price drugs were responsible for one-third of the 
spending.  Specifically, total drug spending in catastrophic coverage 
amounted to $51.4 billion in 2015.  High-price drugs accounted for 
65 percent of it ($33.4 billion of $51.4 billion).  In 2010, high-price drugs 
accounted for 32 percent of total drug spending in catastrophic coverage.   
At the same time, the proportion of beneficiaries receiving these drugs 
increased.  By 2015, 28 percent of all beneficiaries in catastrophic 
coverage received high-price drugs, up from 14 percent in 2010.   
Another factor that contributed to the growth in the Federal payments was 
an increase in the overall number of beneficiaries in catastrophic 
coverage.  From 2010 to 2015, the number of beneficiaries who reached 
                        ____________________________________________________________ 
13 In 2015, Medicare paid a total of $21.4 billion for the direct subsidy and $26.3 billion 
for the low-income subsidy for all stages of the Part D benefit.   
14 This amount represents the price that is negotiated between the sponsors and their 
network pharmacies for the drug, or is the usual and customary price paid to out-of-
network pharmacies.  It is calculated from the PDE record.  Unlike the Federal payments 
for catastrophic coverage, PDE data on total drug spending are not adjusted for rebates 
and other price concessions.  We used these data to gain a better understanding of the 
growth in Federal payments because the PDE records contain information about specific 
drugs. 
 
High-Price Drugs Are Increasing Federal Payments for Medicare Part D Catastrophic Coverage (OEI-02-16-00270)  7 
   
   
catastrophic coverage rose 53 percent, from 2.4 million to 3.6 million.15  
Most of that increase occurred in 2014, when the number of beneficiaries 
entering catastrophic coverage grew by more than half a million.  
Ten high-price drugs accounted for nearly one-third of 
all drug spending for catastrophic coverage in 2015 
Ten high-price drugs were responsible for 30 percent of all drug spending 
in catastrophic coverage in 2015.  Together, they accounted for  
$15.6 billion of drug spending in catastrophic coverage for the year.  Most 
of these drugs had an average price of several thousand dollars per month.  
The total spending for each ranged from $635.5 million to $6.3 billion.16  
The 10 drugs treated conditions such as hepatitis C, cancer, and multiple 
sclerosis (see Table 1). 
   
Table 1:  Ten Drugs Accounted for Nearly One-third of Spending in Catastrophic Coverage, 2015 
FDA  Average  Total Spending 
Approval  Price per  in Catastrophic 
Drug Name  Company*  Key Indications  Year  Month**  Coverage 
Harvoni  Gilead Sciences  Hepatitis C  2014  $33,811  $6,284,357,265 
Revlimid  Celgene  Cancers of the blood  2005  $11,516  $1,718,263,750 
Sovaldi  Gilead Sciences  Hepatitis C   2013  $30,217  $1,209,329,646 
Humira   AbbVie, Inc.  Inflammatory conditions  2002  $3,930  $1,205,270,252 
Copaxone  Teva Pharms USA  Multiple Sclerosis  1996  $5,642  $1,143,986,768 
Gleevec  Novartis  Various cancers  2001  $9,299  $1,021,721,929 
Enbrel  Amgen  Inflammatory conditions  1998  $3,540  $938,254,647 
Tecfidera  Biogen Idec, Inc.  Multiple Sclerosis  2013  $5,595  $735,215,799 
Renvela  Sanofi  Chronic kidney disease  2007  $1,158  $675,261,441 
Xtandi  Astellas  Prostate cancer  2012  $8,673  $635,500,941 
Total          $15,567,162,441 
   
Source:  OIG analysis of Prescription Drug Event records, 2016.
* The term company refers to the New Drug Application (NDA) holder or Biologics License Application (BLA) holder. 
**Note:  The price is the amount paid to the pharmacy by all payers.  It is negotiated between the sponsors and their network pharmacies for the drug, 
or is the usual and customary price paid to out-of-network pharmacies.  It is not adjusted for rebates or other price concessions. 
 
Two hepatitis C treatmentsHarvoni and Sovaldiaccounted for  
$7.5 billion of drug spending in catastrophic coverage in 2015.  The 
average price per month for each of them exceeded $30,000, which means 
that any beneficiary receiving one of these drugs would enter catastrophic 
coverage almost immediately.  Both of these drugs are new to the market, 
having received Food and Drug Administration (FDA) approval in 2013 
and 2014.  
                        ____________________________________________________________ 
15 The number of Part D beneficiaries overall increased by 41 percent from 2010 to 2015.  
16 We did not assess whether Part D drug spending affected spending in other parts of 
Medicare.  
 
High-Price Drugs Are Increasing Federal Payments for Medicare Part D Catastrophic Coverage (OEI-02-16-00270)  8 
   
   
Three of the drugsRevlimid, Gleevec, and Xtandiare indicated for the 
treatment of cancer.  The average price for each of these drugs exceeded 
$8,600 per month.  Together, they accounted for $3.4 billion of drug 
spending in catastrophic coverage in 2015.  Xtandi is the newest of the 
three.  It was approved by FDA in 2012. 
Humira and Enbrel are both biologics that treat inflammatory conditions, 
such as rheumatoid arthritis.  Together, they accounted for $2.1 billion of 
drug spending in catastrophic coverage.17   
Two multiple sclerosis drugsCopaxone and Tecfideraaccounted for 
$1.9 billion in catastrophic coverage in 2015.  The average monthly price 
of each was approximately $5,600 in 2015. 
Lastly, Renvela accounted for $675 million in drug spending in 
catastrophic coverage in 2015.  It is prescribed to individuals with chronic 
kidney disease.  Its average monthly price was nearly $1,200. 
Four of the drugs were new to the market; the remaining six 
had been on the market and had sharp price increases since 
2010 
Of the 10 drugs that accounted for 30 percent of total drug spending in 
catastrophic coverage, four entered the market after 2010.  The remaining 
sixRenvela, Gleevec, Humira, Enbrel, Copaxone, and Revlimidwere 
on the market in 2010.  Since 2010, all six have had steep increases in 
their average price per month.  
From 2010 to 2015, the average price per month of each of the six drugs 
rose by more than $600.  Gleevac, a cancer drug approved in 2001, saw 
the highest increase during this period.  Its average price per month rose 
$4,900, an increase of 112 percent (see Table 2). 
   
                        ____________________________________________________________ 
17 Biologics differ from most drugs.  Instead of being chemically synthesized, they are 
derived from living organisms.  See FDA, What are Biologics Questions and Answers. 
Accessed at 
http://www.fda.gov/AboutFDA/CentersOffices/OfficeofMedicalProductsandTobacco/CB
ER/ucm133077 on May 17, 2016.  
 
High-Price Drugs Are Increasing Federal Payments for Medicare Part D Catastrophic Coverage (OEI-02-16-00270)  9 
   
   
Table 2:  Six High-Price Drugs with Large Increases in Their Average Price 
Per Month, 20102015  
Increase in 
Average Price   Percent 
   Average Price 
Per Month  Increase 
Per Month* 
Brand 
2010  2015  20102015  20102015 
Name 
Gleevec  $4,391  $9,299   $4,907  112% 
Humira  $2,005  $3,930  $1,924   96% 
Copaxone  $3,061  $5,642  $2,581  84% 
Enbrel  $1,886  $3,540   $1,654  88% 
Revlimid  $8,911  $11,516   $2,605   29% 
Renvela  $472  $1,158  $686  145% 
 
Source:  OIG analysis of Prescription Drug Event records, 2016.   
*Note:  The price represents the amount paid to the pharmacy by all payers.  It is negotiated between the sponsors 
and their network pharmacies for the drug, or is the usual and customary price paid to out-of-network pharmacies.  It 
is not adjusted for rebates or other price concessions. 
Some beneficiaries in catastrophic coverage face high 
out-of-pocket costs 
High-price drugs mean high out-of-pocket costs for some beneficiaries.  In 
catastrophic coverage, beneficiaries who do not receive the low-income 
subsidy typically pay 5 percent of each drugs price.  These costs are on 
top of the out-of-pocket costs they face before entering catastrophic 
coverage.   
From 2010 to 2015, beneficiaries out-of-pocket costs for high-price drugs 
in catastrophic coverage increased 47 percent.18  In 2015, beneficiaries 
paid an average of $257 a month for each high-price drug in catastrophic 
coverage, up from $175 in 2010.   
Some beneficiaries faced even higher out-of-pockets costs, especially if 
they were taking hepatitis C drugs.  For two hepatitis C drugs, 
beneficiaries paid more than $1,300 a month.  For example, beneficiaries 
in catastrophic coverage paid an average of $1,556 a month for Harvoni.  
This means that, on average, beneficiaries paid $4,669 for a typical  
3-month course of treatment (see Figure 2). 
   
                        ____________________________________________________________ 
18 This analysis only includes beneficiaries who did not receive the low-income subsidy 
because beneficiaries who receive this subsidy pay little or no coinsurance.  Specifically, 
28 percent or 1 million beneficiaries in catastrophic coverage did not receive the low-
income subsidy in 2015.   
 
High-Price Drugs Are Increasing Federal Payments for Medicare Part D Catastrophic Coverage (OEI-02-16-00270)  10 
   
   
Figure 2:  Average Beneficiary Out-of-Pocket Costs in Catastrophic 
Coverage for Select Drugs, 2015 
 
*Note:  Averages are for beneficiaries who do not receive the low-income subsidy. 
 
Source:  OIG analysis of Prescription Drug Event records, 2016.
 
Beneficiary out-of-pocket costs are not capped in Part D, so there is no 
annual or lifetime limit to the amount that beneficiaries may pay in 
coinsurance.  Beneficiaries receiving more than one high-price drug could 
have out-of-pocket costs amounting to many thousands of dollars.  As 
mentioned earlier, these payments are in addition to the amount that the 
beneficiary pays before entering catastrophic coverage, which in 2015 was 
$4,700. 
   
 
High-Price Drugs Are Increasing Federal Payments for Medicare Part D Catastrophic Coverage (OEI-02-16-00270)  11 
   
   
CONCLUSION 
Federal payments for Part D catastrophic coverage exceeded $33 billion in 
2015, which is more than three times the amount paid in 2010.  Spending 
for high-price drugs contributed significantly to this growth.  
Moreover, in 2015, 10 high-price drugs accounted for nearly one-third of 
all drug spending in catastrophic coverage.  Four of the drugs were new to 
the market; the remaining six had been on the market and had sharp price 
increases since 2010.  The prices for each of these 10 drugs are thousands 
of dollars per month, leading to high out-of-pocket costs for some 
beneficiaries in catastrophic coverage. 
The dramatic growth in Federal payments for catastrophic coverage and 
the underlying issue of high-price drugs must be analyzed and addressed 
to secure the future of the Part D program.  Continued growth at this pace 
may pose a risk to the sustainability of the program.  In addition, the issue 
of high-price drugs is not exclusive to catastrophic coverage; it affects 
Federal payments for the entire Part D benefit and can lead to higher 
premiums and drug costs for all.   
OIG remains committed to examining these issues, as these trends demand 
further analysis.  For instance, we are reviewing the increases in prices for 
brand-name drugs in Part D.19  However, the gravity and complexity of 
these issuesthat is, securing the future of the program while ensuring 
beneficiaries have access to needed drugscalls for a multifaceted 
approach.  
CMS has taken some steps in response to rising drug prices.  Recently, it 
published information about certain drugs with substantial increases in 
price.20  CMS also stated that action is necessary to address rising drug 
costs and asked the industry to partner to find solutions that allow for both 
innovation and affordability.21  Further, the Department held a forum with 
stakeholders that focused on topics such as strengthening incentives and 
promoting competition.  
                        ____________________________________________________________ 
19 For more information, see OIG, Work Plan Fiscal Year 2017.  Accessed at 
https://oig.hhs.gov/reports-and-
publications/archives/workplan/2017/hhs%20oig%20work%20plan%202017.pdf on 
December 1, 2016. 
20 CMS recently published information about these drugs in an effort to address both the 
affordability of prescription drugs and to increase transparency.  See CMSs Medicare 
Drug Spending Dashboard available at https://www.cms.gov/Research-Statistics-Data-
and-Systems/Statistics-Trends-and-Reports/Information-on-Prescription-Drugs/. 
21 CMS Blog, Remarks by Andy Slavitt:  The Need to Partner on Drug Innovation, Access 
and Cost, November 4, 2016.  Accessed at https://blog.cms.gov/2016/11/04/remarks-by-
andy-slavitt-the-need-to-partner-on-drug-innovation-access-and-cost/ on December 1, 
2016. 
 
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Moving forward, CMS will likely need additional tools to address these 
issues.  As mentioned in the background of this report, potential tools have 
been discussed by experts and include restructuring the Part D benefit so 
that sponsors have more incentives and opportunities to lower costs, 
creating more transparency about drug pricing, promoting value-based 
options, and revising the law to allow the Federal Government to negotiate 
prices for certain drugs.  CMS should carefully assess these and other 
options, taking into account beneficiary costs and access to needed drugs, 
and should, working with Congress, make any needed changes to the  
Part D program.   
 
 
   
 
High-Price Drugs Are Increasing Federal Payments for Medicare Part D Catastrophic Coverage (OEI-02-16-00270)  13 
   
   
APPENDIX A 
   
The Standard Part D Benefit, 2015a   
 
     
CATASTROPHIC 
DEDUCTIBLE  INITIAL COVERAGE  COVERAGE GAP 
COVERAGE  
Total drug  Total drug spending is  Total drug spending is more than 
Beneficiary's out-of-pocket 
spending is $320  more than $320 but less  $2,960, but the beneficiarys out-of-
costs are over $4,700  
or less  than or equal to $2,960  pocket costs are $4,700 or lessb 
FOR BRAND-NAME DRUGS: 
 
Manufacturer Discount 50%  
 
Beneficiary Pays 45% 
 
 
Sponsor Pays 75%  Sponsor Pays 5%c  Federal Government Pays 
80% through Reinsurance 
Subsidy 
Beneficiary Pays 
100% 
FOR GENERIC DRUGS: 
 
Beneficiary Pays 65% 
 
Sponsor Pays 35% 
Beneficiary Pays 25%  Sponsor Pays 15% 
Beneficiary Pays 5%d 
a This represents the standard benefit for beneficiaries who are not enrolled in the low-income subsidy.  The Federal 
Government shares the risk with sponsors to provide the basic benefit.  The amount the Federal Government 
prospectively pays each sponsor is based on estimated costs.  These payments are reconciled at the end of the year 
with actual benefit costs that the sponsor paid.  If the sponsors have overall profits or losses that exceed certain 
thresholds, the Federal Government shares these profits or losses with the sponsor.   
b When calculating beneficiaries out-of-pocket costs, CMS includes some payments by third-party payers, such as State 
pharmacy assistance plans.  It also includes manufacturer discounts received through the Coverage Gap Discount 
Program. 
c For applicable brand-name drugs, the manufacturer provides a 50-percent discount in the coverage gap, while the 
sponsor pays 5 percent of the ingredient cost and sales tax and 55 percent of the dispensing and vaccine administration 
fees. 
d Beneficiary coinsurance is the greater of 5 percent of the total drug cost or $2.65 for generic or $6.60 for brand-name 
drugs. 
Source:  OEI analysis of CMS guidance, 2016. 
 
High-Price Drugs Are Increasing Federal Payments for Medicare Part D Catastrophic Coverage (OEI-02-16-00270)  14 
   
   
APPENDIX B:  DETAILED METHODOLOGY 
Data Sources and Analysis 
Analysis of Federal Payments for Catastrophic Coverage 
We analyzed data from CMSs Payment Reconciliation System (PRS) to 
determine the total amount the Federal Government paid for catastrophic 
coverage through the reinsurance subsidy.22  We analyzed the data by plan 
for 2006 through 2015.23  For each plan, we determined the amount that 
the Federal Government paid for catastrophic coverage through the 
reinsurance subsidy for each year.  We then summed all payments for the 
reinsurance subsidy for each year to determine the amount the Federal 
Government paid for catastrophic coverage. 24  In total, we analyzed the 
data for between 3,431 and 5,080 plans each year.  These are actual 
amounts the Government paid for catastrophic coverage after rebates and 
other price concessions are taken into account.  
We followed a similar process to determine the total amount the Federal 
Government paid for the direct subsidy and the low-income subsidy for 
each year.  We also calculated the total amount the Federal Government 
paid for all three subsidies each year. 25    
Analysis of Total Drug Spending in Catastrophic Coverage 
To better understand the growth in Federal payments, we analyzed the 
PDE records from 2010 to 2015.  Part D sponsors submit a PDE record to 
                        ____________________________________________________________ 
22 In addition, to estimate the amount the Federal Government contributed to catastrophic 
coverage through the low-income subsidy, we summed the amount of low-income cost-
sharing reported on each PDE record for the drugs dispensed entirely in catastrophic 
coverage.  We did not include PDE for drugs that straddled the coverage gap and 
catastrophic coverage.   
23 We based this analysis on the final reconciled data, including any revisions that 
occurred during a reopening, that was available as of October 5, 2016.  Years 2006 and 
2008 were each reopened twice, and years 2007, 2009, and 2010 were each reopened 
once.  Not all plans participated in each reopening.  We analyzed the most updated 
information for each plan.  For example, if plan A participated in both reopenings for 
2008, we used the data from the second reopening.  However, if plan B participated in 
only the first reopening for 2008, we used data from the first reopening. 
24 These payments do not include the amount that the Federal Government pays for the 
low-income cost-sharing subsidy for beneficiaries in catastrophic coverage and the 
amount that the Federal Government contributes to the 15 percent that the sponsor pays 
for catastrophic coverage. 
25 This analysis includes payments made through the Limited Income Newly Eligible 
Transition (LINet) program, which provides temporary Part D coverage for low-income 
beneficiaries under certain circumstances.  This analysis does not include Federal 
payments for the Retiree Drug Subsidy Programunder which the Government 
reimburses certain qualified retiree prescription drug plans for a portion of their drug 
costs for individuals who would otherwise have been covered by Part D.  For more 
information, see 42 C.F.R.  423.884.      
 
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CMS each time a drug is dispensed to a beneficiary enrolled in their 
plans.  We used the PDE records because they contain information on the 
specific drugs that were dispensed in catastrophic coverage. 
We analyzed the PDE records to identify trends in total drug spending for 
catastrophic coverage.  We identified all PDE records that had dates of 
service in these years, which amounted to between 1.1 billion and 1.4 
billion records per year.  We first calculated total drug spending for 
catastrophic coverage from 2010 to 2015.  To do this, we calculated the 
amount spent on all drugs dispensed in catastrophic coverage.  To 
determine this amount, we summed four fields on the PDE records
ingredient cost, dispensing fee, sale tax, and vaccine administration fee. 26  
This amount represents what is paid to the pharmacy at the point of sale by 
all payers.  It is the price negotiated between the sponsors and their 
network pharmacies, or is the usual and customary price paid to out-of-
network pharmacies.  It is not adjusted for manufacturer rebates or other 
price concessions that the sponsors may receive.  We summed this amount 
for all drugs dispensed in catastrophic coverage to determine total drug 
spending. 
We then determined the average price per month for each drug, by drug 
name.  To do this, we matched the National Drug Code (NDC) on each 
PDE record to First DataBank to identify each drugs name. 27  For each 
differently named drug, we determined the average price per month. 28  We 
considered drugs with an average price per month of more than $1,000 to 
be high price.29  We determined the total amount of spending for these 
high-price drugs each year.  
In addition, we calculated the number of beneficiaries who entered 
catastrophic coverage and the number of beneficiaries who received high-
price drugs in catastrophic coverage for 2010 and 2015.   
                        ____________________________________________________________ 
26 When a drug was covered partially in the coverage gap and partially in catastrophic 
coverage, we included only the portion of the price covered in catastrophic coverage in 
our analysis. 
27 We based this analysis on a field in First Databank that identifies the drug name.  We 
analyzed brand-name and generic versions of the same drug separately; we did not 
differentiate between different strengths and forms of the same drug.   
28 We determined the average price of each drug based on a 30-day supply.  If the drug 
was dispensed for a different number of days, we adjusted the price.  We use the term 
month to refer to a 30-day supply.   
29 We considered a drug to be high price if its average price per month was more than 
$1,000 and its annual total spending per beneficiary was more than $1,000.  We 
developed these criteria by looking at the distribution of all drugs in catastrophic 
coverage. 
 
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Finally, we conducted in-depth analysis of specific high-price drugs in 
2015.  We calculated the spending for each drugby drug namethat 
was dispensed in catastrophic coverage.  We then identified the high-price 
drugs that had the highest total spending in catastrophic coverage.  For 
each of these drugs, we reviewed FDA-approved drug labels to determine 
the key indications and the year they received FDA approval.  We also 
calculated the average beneficiary out-of-pocket costs in catastrophic 
coverage for high-price drugs in 2010 and 2015 and the average out-of-
pocket costs for selected high-price drugs in 2015.30    
   
                        ____________________________________________________________ 
30 For this analysis, we included only PDE records that were covered entirely in 
catastrophic coverage.  We excluded PDE records for beneficiaries receiving the low-
income subsidy.  We also excluded payments made on behalf of beneficiaries by third-
party payers, such as State pharmacy assistance plans.   
 
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ACKNOWLEDGMENTS 
This report was prepared under the direction of Jodi Nudelman, Regional 
Inspector General for Evaluation and Inspections in the New York regional 
office, and Nancy Harrison and Meridith Seife, Deputy Regional 
Inspectors General.  
Miriam Anderson served as the team leader for this study.  Other Office of 
Evaluation and Inspections staff from the New York regional office who 
conducted the study include Margaret Himmelright and Jason Kwong.  
Office of Evaluation and Inspections staff who provided support include 
Clarence Arnold, Althea Hosein, and Meghan Kearns.  We would also like 
to acknowledge the contributions of other Office of Inspector General 
staff, including Jessica Swanstrom. 
 
 
 
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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.