Department of Health and Human Services

OFFICE OF 

INSPECTOR GENERAL 

 

CONCERNS WITH REBATES 

MEDICARE PART D PROGRAM 

IN THE 

 

Daniel R. Levinson 

Inspector General 

March 2011 

OEI-02-08-00050 
 EXECUTIVE SUMMARY 

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. 

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EXECUTIVE SUMMARY 

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 marketshare 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. 

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EXECUTIVE SUMMARY 

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. 

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EXECUTIVE SUMMARY 

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 CMS’s 

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 

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EXECUTIVE SUMMARY 

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. 
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 TABLE OF CONTENTS 

EXECUTIVE SUMMARY .....................................i

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 

FINDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 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 

RECOMMENDATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 

Agency Comments and Office of Inspector General Response . . . 21 

APPENDIX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 

A: Agency Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 

ACKNOWLEDGMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
 

INTRODUCTION INTRODUCTION 

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. 

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I NTRODUCTION DUCTION 

MA-PD plan). Sponsors typically offer drug coverage under multiple 

plans. These plans may differ in their benefit design, such as the 

specific drugs they cover and the copayments they charge, or they may 

differ in the geographic regions they cover. 

Sponsors are required to offer, at a minimum, a basic prescription drug 

benefit that is either the defined standard prescription drug benefit or is 

“actuarially equivalent” to the standard benefit.3 Most beneficiaries are 

responsible for certain costs, which may include a monthly premium, an 

annual deductible, and coinsurance or 

copayments. However, certain low-income beneficiaries are eligible to 

receive a subsidy that pays some or all of these costs.4

Sponsors are required to offer, at a minimum, a basic prescription drug 

benefit that is either the defined standard prescription drug benefit or is 

“actuarially equivalent” to the standard benefit.3 Most beneficiaries are 

responsible for certain costs, which may include a monthly premium, an 

annual deductible, and coinsurance or 

copayments. However, certain low-income beneficiaries are eligible to 

receive a subsidy that pays some or all of these costs.4

For each of their plans, sponsors develop a list of covered drugs, known 

as a formulary. A formulary often gives preference to certain drugs over 

other drugs that treat the same condition. The drugs on each formulary 

are organized into broad therapeutic categories and subsets called 

pharmacologic classes. Each formulary must include at least two drugs 

within each category or class. In addition, each formulary must include 

“all or substantially all” drugs in six categories, which are often referred 

to as protected classes.5 Beginning in 2011, however, sponsors are 

required to include on their formularies all drugs in categories and 

classes that CMS identifies as being of clinical concern.6 CMS is 

currently determining how it will identify these categories and classes.

For each of their plans, sponsors develop a list of covered drugs, known 

as a formulary. A formulary often gives preference to certain drugs over 

other drugs that treat the same condition. The drugs on each formulary 

are organized into broad therapeutic categories and subsets called 

pharmacologic classes. Each formulary must include at least two drugs 

within each category or class. In addition, each formulary must include 

“all or substantially all” drugs in six categories, which are often referred 

to as protected classes.5 Beginning in 2011, however, sponsors are 

required to include on their formularies all drugs in categories and 

classes that CMS identifies as being of clinical concern.6 CMS is 

currently determining how it will identify these categories and classes.

Sponsors can also use other methods to give preference to certain drugs 

over others. These methods—called utilization management tools—

place restrictions on the use of certain drugs on their formularies. For 

example, sponsors may require a beneficiary to seek prior authorization 

before he or she is able to receive a certain drug. Sponsors may also 

Sponsors can also use other methods to give preference to certain drugs 

over others. These methods—called utilization management tools—

place restrictions on the use of certain drugs on their formularies. For 

example, sponsors may require a beneficiary to seek prior authorization 

before he or she is able to receive a certain drug. Sponsors may also 

2 

3 42 U.S.C. § 1395w-102 and 42 CFR §§ 423.104(d) and (e). “Actuarially equivalent” 

means that the plan’s 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. 19766–19767. 

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INTRODUCTION 

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 

3 

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. 

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INTRODUCTION 

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 sponsor’s 

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 

4 

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. 

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INTRODUCTION I N T R O D U C T I O N 

use one of these methods.17 The methods sponsors use are important 

because they can affect the amounts that the Government ultimately 

pays sponsors for providing the benefit. If a reasonable method is not 

used, sponsors may allocate rebates strategically across plans to 

increase the payments they receive from the Government. 

use one of these methods.17 The methods sponsors use are important 

because they can affect the amounts that the Government ultimately 

pays sponsors for providing the benefit. If a reasonable method is not 

used, sponsors may allocate rebates strategically across plans to 

increase the payments they receive from the Government. 

Related Work 

A 2010 OIG report found vulnerabilities in CMS’s controls to detect 

inaccuracies in sponsors’ rebate reports.18 Specifically, the report found 

that CMS’s current controls to ensure the completeness and accuracy of 

rebate reporting may not find all potential inaccuracies that need to be 

followed up. It further noted that if rebates are understated and CMS’s 

controls fail to detect the understatement, the sponsor could receive a 

larger yearend payment from CMS than the amount to which it was 

entitled. To address this, OIG recommended that CMS strengthen 

controls to ensure completeness and accuracy of rebate data before 

reconciliation. 

A 2010 OIG report found vulnerabilities in CMS’s controls to detect 

inaccuracies in sponsors’ rebate reports.18 Specifically, the report found 

that CMS’s current controls to ensure the completeness and accuracy of 

rebate reporting may not find all potential inaccuracies that need to be 

followed up. It further noted that if rebates are understated and CMS’s 

controls fail to detect the understatement, the sponsor could receive a 

larger yearend payment from CMS than the amount to which it was 

entitled. To address this, OIG recommended that CMS strengthen 

controls to ensure completeness and accuracy of rebate data before 

reconciliation. 

A 2008 report by the Government Accountability Office (GAO) examined 

how CMS ensures the reliability of the data in sponsors’ rebate 

reports.19 GAO found that CMS conducted some checks of the reported 

price concessions data prior to reconciliation to identify outliers and 

questionable data. GAO also found that CMS had begun fewer than 

half of the required financial audits intended to evaluate the validity 

and accuracy of the price concessions data. In addition, GAO found that 

the variation in defining and reporting price concessions data may 

create oversight challenges. 

A 2008 report by the Government Accountability Office (GAO) examined 

how CMS ensures the reliability of the data in sponsors’ rebate 

reports.19 GAO found that CMS conducted some checks of the reported 

price concessions data prior to reconciliation to identify outliers and 

questionable data. GAO also found that CMS had begun fewer than 

half of the required financial audits intended to evaluate the validity 

and accuracy of the price concessions data. In addition, GAO found that 

the variation in defining and reporting price concessions data may 

create oversight challenges. 

17 The 2009 guidance states, for example, that allocating rebates based on each plan’s use 

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. 13–14. 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. 3–4 and 13. 

19 GAO, Medicare Part D Prescription Drug Coverage: Federal Oversight of Reported 

Price Concessions Data, GAO-08-1074R, September 2008, p. 4. 
 

INTRODUCTION 

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 CMS’s 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 CMS’s 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 beneficiary’s total 

enrollment months and aggregated these data for all plans offered by 

each sponsor.22 We then divided each sponsor’s 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. 

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INTRODUCTION 

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. 

7 

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. 

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INTRODUCTION 

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. 

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INTRODUCTION 

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. 
 

Chart 1: Average Rebates per Beneficiary per Month Received by Sponsors, 2008 

17% 

27% 

38% 

17% 

0% 

10% 

20% 

30% 

40% 

No Rebates Reported $10 or Less Between $10 and $20 $20 or More 

Percentage of Sponsors

N=258 

FINDINGS

Medicare Part D sponsors reported 

receiving $6.5 billion in drug 

manufacturer rebates in 2008 

 

For 2008, Part D sponsors reported 

receiving $6.5 billion in manufacturer 

rebates for Part D drugs. 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 

2008.25 

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. 

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 sponsor’s average per beneficiary per 

month rebate amounts. 

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FINDINGS 

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. 

11 

Table 1: Rebates Received by Sponsors, 2008 

Beneficiary Enrollment in Sponsors’ Plans Number of 

Sponsors 

Percentage of 

Beneficiaries 

Average Rebates 

per Beneficiary 

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. 

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FINDINGS 

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 

full amount of manufacturer 

rebates on to beneficiaries in 

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 commonly underestimated 

rebates in their bids, which led to higher 

beneficiary premiums 

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 

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FINDINGS 

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 

Underestimated Rebates per Beneficiary per Month Percentage of 

Part D Bids 

Percentage of 

Part D 

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 

13 

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. 

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FINDINGS 

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. 

Drug manufacturers provide 

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. 

Selected sponsors received rebates when 

they encouraged beneficiaries to use certain drugs 

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. 

14 

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 manufacturer’s 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. 

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FINDINGS 

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 competitor’s drug must have a higher copayment than that of the 

rebated drug. Other agreements required the sponsor to exclude a 

competitor’s 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. 

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FINDINGS 

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 plan’s 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, it’s 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. 

16 

31 The remaining two sponsors did not comment on this issue. 

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FINDINGS 

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.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 

17 

32 CMS’s 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. 

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FINDINGS 

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 PBM’s 

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 sponsor’s 

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 sponsor’s 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 

18 

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. 

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FINDINGS 

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. 

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 RRECOMMENDATIONS ECOMMENDATIONS 

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. 

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RECOMMENDATIONS 

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 information—and perhaps target certain sponsors to 

audit—to 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 

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RECOMMENDATIONS 

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 

CMS’s 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 

Government’s 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 Government’s 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 CMS’s comments, we modified our recommendation and 

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RECOMMENDATIONS 

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 CMS’s 

comments. For the full text of CMS’s comments, see Appendix A. 
Centers for Medicare & Medicaid Services

/"""0<$-., (# DEPAKlMENT OF HEALTH. HUMAN SERVICES

Administrator

Washington, DC 20201

DATE: DEC 16 20W

TO: Daniel R. Levinson

Inspector General

FROM: Donald M. Berwick, MD

Administrator

SUBJECT: Office of Inspector General (OIG) Draft Report: Concerns with Rebates in the

Medicare Part D Program (OEI-02-08-00050)

Thank you forthe opportunity to review and comment on this OIG draft report, which evaluates

rebates in the .Medicare Part D Program. The objective ofthe study was to review the rebates

received by part Dsponsors and reported to the Centers for Medicare & Medicaid Services

(CMS) in order to determine the following:

• The extent to which all Part Dsponsors received rebates in 2008;

• The extent to which all Part D sponsors passed rebates on to beneficiaries;

• The nature of the rebates received by selected sponsors; and

• The nattrre of selected sponsors' contractual relationships with pharmacy benefit

managers (PBMs).

The OIG made several recommendations to .ensure that rebates are reported accurately such that

the Government and beneficiaries receive the full benefit of these rebates. Currently, CMS

conducts s~veral Eevi~Vls of the rebate and other price concessions data reported by Part D

sponsors to ensure that these data are reported accurately to CMS. Specifically, CMS evaluates

the rebates amounts projected in the Part D bids, conducts reasonableness reviews on the direct

and indirect remuneration (DIR) data prior to inclusion in Part D payment reconciliation, and

validates the DIR data during the Part D financial audits. However, given the impact of these

data on the costs incurred by beneficiaries and the Government, CMS understands the OIG's

concerns. We look forward to continuing to work with the OIG to strengthen the Medicare Part

D Program. Below is CMS' response to the OIG's recommendations.

OIG Recommendation

CMS Should Take Steps to Ensure That Sponsors More Accurately Include Their Expected

Rebates in Their Bids.

o E1·02· 0 8·00050 CONCERNS WITH REBATES iN THE MEDiCARE PART D PROGRAM

APPENDIX ~ A APPENDIX~A 

Centers for Medicare & Medicaid Services Comments

 O E I - 0 2 - 0 8 - 0 0 0 5 0 C ONCERNS WITH REBATES IN THE MEDICARE PART D P ROGRAM 24 

 
 

APPENDIX ~ A 

 O E I - 0 2 - 0 8 - 0 0 0 5 0 C ONCERNS WITH REBATES IN THE MEDICARE PART D P ROGRAM 25 
 

APPENDIX ~ A 

 O E I - 0 2 - 0 8 - 0 0 0 5 0 C ONCERNS WITH REBATES IN THE MEDICARE PART D P ROGRAM 26 
 

APPENDIX ~ A 

 O E I - 0 2 - 0 8 - 0 0 0 5 0 C ONCERNS WITH REBATES IN THE MEDICARE PART D P ROGRAM 27 
 

 O E I - 0 2 - 0 8 - 0 0 0 5 0 C ONCERNS WITH REBATES IN THE MEDICARE PART D P ROGRAM 28 

APPENDIX C 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 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. 
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 OIG’s 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. 

Office of Counsel to the Inspector General 

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. 

The Office of Investigations (OI) conducts criminal, civil, and administrative investigations 

Office of Investigations 

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 Evaluation and Inspections 

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 Audit Services 

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: