New CCF Issue Brief on Strengthening Effective Medicaid Drug Rebate Program

Today, we issued our fifth issue brief in our Future of Children’s Health Coverage series. It focuses on how to build upon and improve the Medicaid Drug Rebate Program at both the federal and state levels in order to help state Medicaid programs better address their rising prescription drug costs.  This, in turn, would ensure continued access to needed prescription drugs for tens of millions of low-income children, families, people with disabilities and other beneficiaries who rely on Medicaid today.

Key points from the issue brief include:

  • Prescription drugs are essential for the health of tens of millions of low-income children enrolled in Medicaid. They not only are part of routine pediatric care but also provide critical treatment and maintenance for chronic conditions such as asthma and attention deficit hyperactivity disorder, illnesses like childhood cancers, serious behavioral health issues, and rarer conditions such as cystic fibrosis and spinal muscular atrophy.
  • The Medicaid Drug Rebate Program is highly effective. For example, in 2016, rebates paid by drug manufacturers lowered Medicaid prescription drug costs by more than 51 percent, compared to rebate savings of only 19.9 percent in Medicare Part D.  In 2017, manufacturer rebates lowered Medicaid prescription drug costs by 54.5 percent.
  • The Medicaid Drug Rebate Program ensures beneficiary access to prescription drugs. Except for a very limited set of drug classes, state Medicaid programs cannot outright deny coverage of drugs produced by manufacturers participating in the drug rebate program.  In addition, Medicaid limits drug co-payments to nominal amounts.  Access protections in Medicaid are particularly robust for children: the Early and Periodic Screening, Diagnostic, and Treatment (EPSDT) benefit ensures that children can obtain any drugs their providers determine they need and for most children on Medicaid, co-payments and other cost-sharing are prohibited entirely.
  • Federal policymakers could consider several options to strengthen the Medicaid Drug Rebate Program. These include: increasing the rebates to deter excessive launch prices for new drugs, increasing the rebates to deter annual price increases for existing drugs, eliminating the cap on total rebate amounts, including all Pharmacy Benefit Manager rebates in Medicaid rebate calculations, conducting periodic audits to better ensure manufacturer compliance, giving states confidential access to rebate pricing data, barring manufacturer gaming related to authorized generics, providing stronger enforcement tools to deter the misclassification of drugs, and extending the rebate program to separate state CHIP programs.
  • State policymakers could adopt several policies already available under federal law. These include: expanding the supplemental rebates that states negotiate with drug manufacturers, maximizing the rebates negotiated by Medicaid managed care plans, reviewing the effectiveness of multi-state purchasing arrangements, increasing drug pricing transparency, enhancing the use of drug effectiveness reviews, and assessing state drug utilization review programs.

Federal and state policymakers, however, should firmly reject any proposals that would have the effect of weakening or undermining the Medicaid Drug Rebate Program.  For example, in last year’s budget, the Trump Administration proposed a demonstration project under which up to five states would entirely opt out of the Medicaid Drug Rebate Program, negotiate rebates on their own, and be given new expansive authority to deny or restrict coverage of drugs through closed formularies.  (The Administration has also encouraged states to seek similar waivers opting out of the rebate program, as well.)  As I have previously explained, it is highly unlikely that states could negotiate discounts with drug manufacturers anywhere close to what is provided under the rebate program today, let alone obtain larger rebates.  As a result, if states opt out of the rebate program, it would substantially increase federal and state Medicaid prescription drug costs.  The only way states could garner a comparable or higher level of prescription drug cost savings, relative to current law, is by sharply cutting access to needed high-cost drugs.  Low-income Medicaid beneficiaries, including especially vulnerable populations like people with disabilities and chronic conditions, would therefore be at significant risk of going without clinically effective drugs if the medications they need are simply dropped from Medicaid formularies or subject to overly restrictive clinical requirements solely on the basis of cost.

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