Highly Misleading Claim on Medicaid and Drug Pricing Does Not Withstand Scrutiny

A recent report from the HHS Office of Inspector General found that Medicare Part D spending on brand-name drugs, net of rebates, increased by 62 percent between 2011 and 2015.  For nearly half of all brand-name drugs reimbursed by Part D, unit costs increased by at least 50 percent and for 12 percent of such drugs, unit costs at least doubled.

While the report brought renewed calls for addressing rising drug prices and costs in both Medicare and overall, the conservative American Action Forum instead tries to divert attention from drug companies and misleadingly blame the Affordable Care Act, including its improvements to the highly effective Medicaid drug rebate program, for much of the high launch prices and drug price increases instituted by manufacturers in recent years affecting not only Medicare but the overall U.S. health care system.  That mirrors misleading claims in the Trump Administration’s drug pricing blueprint implying that Medicaid may have been somehow a major contributor to rising drug prices (for both new and existing drugs) and significant prescription drug spending growth in recent years.  These claims fall apart under the barest scrutiny.

The American Action Forum analysis is riddled with errors.  For example, it cites a Congressional Research Service analysis as showing that Medicaid rebates reduced total state Medicaid prescription drug costs by nearly 63 percent in 2013.  The actual percentage is about 49 percent under CRS’ own data (the American Action Forum analysis incorrectly looked only at fee-for-service expenditures and rebates without incorporating managed care drug spending and rebates).  It claims that Medicaid rebate data could not be found for 2014 and 2015, even though those data are readily available in public Medicaid expenditure data from the Centers for Medicare and Medicaid Services.  Its estimates of the total Medicaid drug rebates paid by manufacturers for the period 2011-2015 are about 20 percent too low.

But the most glaring flaw in the American Action Forum analysis is its fundamental misunderstanding of the causal relationship between drug spending and Medicaid rebates.  Because Medicaid rebates are based on drug pricing and utilization, if drug prices and/or utilization rise, Medicaid rebate amounts correspondingly increase in response in order to offset a portion of the resulting increase in state Medicaid costs.  And the Affordable Care Act’s improvements help state Medicaid programs better absorb higher drug costs.

Instead, the American Action Forum tries to absurdly argue the opposite: Medicaid rebates cause drug prices to increase so improving the rebates, as the Affordable Care Act did, were a major contributor to the recent rise in drug prices and spending.  The American Action Forum offers no specific evidence to support its misleading claim, except to cite the Medicaid improvements (and other Affordable Care Act prescription drug provisions) being enacted and higher Medicare Part D spending and overall drug pricing and spending trends in recent years.

For the American Action Forum’s claim to be at all valid, there would have to be a clear relationship between when the Affordable Care Act’s Medicaid rebate improvements took effect and overall drug pricing and spending trends.  As one would expect, a simple examination of drug pricing and spending trends shows there isn’t.

Starting in calendar year 2010, the Affordable Care Act reduced federal and state Medicaid prescription drug costs by increasing the minimum base rebate for brand-name drugs from 15.1 percent to 23.1 percent, raising the base rebate for generic drugs from 11 percent to 13 percent, and extending rebates to Medicaid managed care.  Yet when these improvements took full effect coincided with several years when prescription drug spending growth was very modest.  In fact, according to the IMS Institute for Healthcare Informatics (now the IQVIA Institute for Human Data Science), prescription drug spending growth actually declined in nominal terms in 2012.  The CMS Office of Actuary similarly found growth in retail prescription drug expenditures was only 0.2 percent in 2012.  These overall spending trends were driven by the loss of patent exclusivity for major brand-name drugs, fewer innovative new brand-name products entering the market and reduced utilization in the aftermath of the recession.

The fifth year of the Affordable Care Act’s Medicaid rebate improvements — 2014 — then coincided with a rapid increase in overall prescription drug spending.  While the American Action Forum tries to also blame implementation of the Medicaid expansion and increased utilization in that year, it has been well-documented (here and here) that the key factors driving this growth were a significant increase in the number of costly new innovative brand-name drugs like drugs treating Hepatitis C, fewer costly brand-name drugs going off-patent, and the rapidly rising share of drug spending attributable to specialty drugs.  Those trends have largely continued, particularly the growth in specialty drugs.

Could drug manufacturers have raised prices to some extent in response to the ACA’s Medicaid rebate improvements since 2010?  Of course, but the effect of the improvements was likely very modest.  The Congressional Budget Office, for example, expected that the Medicaid rebate improvements could result in drug manufacturers raising list prices for new drugs in response but the increases in the average retail price for new drugs paid by pharmacies would be no more than 4 percent, relative to prior law.  For existing drugs, CBO expected little or no effect on pricing from the Medicaid improvements, in part, because of the deterrent effect of the additional Medicaid rebate if prices rise faster than general inflation and the ability of states to negotiate supplemental Medicaid rebates with manufacturers.

Instead, it is clear that the Affordable Care Act’s Medicaid drug rebate improvements — as well as subsequent improvements enacted into law that extended inflation-related rebates to generic drugs and clarified how line extensions of brand-name drugs are treated — combined with the underlying rebate program, have helped reduced the fiscal burden on the federal government and the states resulting from rising Medicaid drug costs due to these overall prescription drug cost trends starting in 2014.  Conversely, eliminating these critical improvements to the Medicaid drug rebate program (or weakening the program overall) would substantially increase federal and state Medicaid costs for prescription drugs in the face of new costly specialty drugs.

In fact, the real takeaway from the HHS OIG report is that consistent with other research, private Medicare Part D insurers are doing relatively poorly in negotiating rebates and reducing prescription drug costs in the face of these broader pricing and cost trends.  As I’ve previously written (here and here), the Medicaid rebate program is highly effective.  Medicaid rebates are far greater than those in Medicare Part D and thus reduce a much larger percentage of prescription drug costs (51.3 percent in Medicaid compared to 19.9 percent in Medicare Part D in 2016).  Requiring Medicaid-level rebates just for low-income beneficiaries in Medicare Part D would produce federal savings of $145 billion over ten years, according to estimates from the Congressional Budget Office.

Edwin Park is a Research Professor at the Georgetown University McCourt School of Public Policy’s Center for Children and Families.