As federal efforts to address prescription drug costs intensifies, this three-part blog series addresses misleading claims or confusion about Medicaid, its highly effective drug rebate program and overall drug pricing issues in the hopes of better informing the debate moving forward.

Part I | Part II

Medicaid’s best price requirement is not the reason why private insurance obtains far smaller prescription drug discounts than Medicaid.  Under the Medicaid Drug Rebate Program, in the case of brand-name drugs, manufacturers must pay a base rebate equal to 23.1 percent of the Average Manufacturer Price (AMP) or the AMP minus the “best price” provided to most other purchasers, whichever is greater.  Ever since the rebate program was established, its critics have argued that the best price requirement is limiting rebates and resulting in higher net prescription drug costs in the private insurance market. Recent examples include the Trump Administration’s drug blueprint and a recent Fortune commentary.

Typically, critics of best price cite an older Congressional Budget Office analysis and a National Bureau of Economic Research (NBER) working paper, both from 1996, to buttress their arguments about the Medicaid best price requirement.  Both papers found that after the rebate program first took effect, manufacturers significantly reduced the rebate amounts for private insurance plans for some drugs to avoid triggering best price (though the NBER analysis found that this occurred among brand-name drugs with generic competitors with little evidence of an impact among brand-name drugs under patent without generic competitors).

It is difficult, however, to see how best price is to blame for why private insurers are currently obtaining average rebates (16 percent) for brand-name drugs that are far lower than those in Medicaid (61 percent), according to Altarum estimates.  Here are a number of reasons why:

• As I previously explained in Part I of this blog series, the drug pricing landscape was far different when the rebate program was first implemented than it is today.  Medicaid had been paying full list price previously. In order to compensate for a substantial reduction in their Medicaid-related revenues, manufacturers lowered their discounts and raised net prices for private insurance, although CBO found that any price increases and reductions in discounts and rebates in response to the best price requirement appeared to be a short-term phenomenon.  CBO noted in its 1996 analysis that by 1994 manufacturers had largely ended their price increases in response to best price and that it did not expect any further declines thereafter. More importantly, manufacturers were likely free to raise prices in the private insurance market because there was far less ability on the part of plans and employers to resist price increases as the use of PBMs and other management tools (such as formularies and tiered co-payments) was not widespread as it is today.  CBO, for example, stated at the time that it was a relatively new trend that payers were starting to manage their drug benefits with formularies and contract with pharmacy benefit managers. In contrast, CBO estimated in 2010 that the Affordable Care Act’s Medicaid rebate improvements would not increase costs in employer-sponsored insurance because insurers would be able to negotiate larger rebates to blunt any price increases by manufacturers.

• Rebates negotiated by Medicare Part D plans are already exempt from best price.  As part of the Medicare drug law, Congress specifically excluded Medicare Part D rebates from the calculation of best price because of concerns that the best price provision could interfere with the expected ability of Part D private insurance plans to negotiate larger rebates than those required under Medicaid.  And in its final estimate of Medicare Part D, CBO assumed, consistent with the findings of its 1996 analysis, that the best price exemption would help somewhat reduce Medicare spending because Part D would give “plans more leeway to negotiate steeper price discounts from manufacturers since those manufacturers would not have to pass on the same discount to Medicaid.”  Those assumptions, however, turned out to be wholly incorrect.Medicare Part D rebates ended up considerably smaller than those achieved in Medicaid even though they were exempt from best price.  Moving drug coverage from Medicaid to Medicare for the dual eligibles resulted in significant financial windfalls in 2006 for manufacturers whose products were disproportionately used by low-income seniors and people with disabilities on both Medicare and Medicaid.  And the gap in rebates between Medicaid and Medicare Part D continues to be substantial. For example, as I have previously written, in fiscal year 2016, Medicaid rebates lowered prescription drug costs by 51.3 percent, compared to only 19.9 percent in Medicare Part D.  The HHS Office of Inspector General found that the median unit rebate amount in Medicaid was about three times larger than under Part D in 2012 and 10 times or more for many drugs.  In addition, preliminary results from an analysis conducted by CBO finds that for the top-selling brand-name specialty drugs, the weighted average Medicaid rebates was more than three times larger than in Part D.  That is why CBO currently estimates that imposing Medicaid-level rebates just for low-income beneficiaries in Medicare Part D would produce federal savings of $154 billion over ten years. Extending Medicaid-level rebates to the entire Part D program would produce even larger savings.

• Other assumptions in the 1996 CBO analysis are similarly outdated.  For example, prior to the widespread adoption of managed care in Medicaid, CBO stated that Medicaid managed care plans could negotiate their own discounts that were as good or better than under the rebate program including its best price requirement.  That also turned not to be the case, as CBO subsequently estimated that extending the Medicaid Drug Rebate Program to Medicaid managed care would produce savings prior to the ACA instituting that extension (even without an increase in the minimum rebate).  That is because CBO found that the rebates negotiated by Medicaid managed care plans were considerably less than those obtained under the rebate program which had applied only to fee-for-service before the ACA.

• Furthermore, CBO noted in its 2010 estimate of the Affordable Care Act’s rebate improvements that the increase in the minimum base rebate from 15.1 percent of AMP to 23.1 percent of AMP would “give manufacturers greater flexibility to offer larger rebates on existing drugs to a subset of private purchasers” without implicating best price.  In other words, it is more likely that for some (but certainly not all) drugs, the base rebate now equals the minimum rebate amount, rather than the best price. In other words, the best price requirement may be triggered to a lesser degree than before the ACA, though it likely still is implicated for certain high-cost prescription drugs especially those facing competing brand-name drugs from other manufacturers in the same drug class.

• The findings of the NBER and CBO analysis from 1996 are often overstated.  The NBER study found that the average increase in the retail price of a brand-name drug facing generic competition was only about 4 percent (and as noted above, found little evidence of best price-related price increases for brand-name drugs without competition).  Similarly, CBO found that best price had less effect on the pricing of highly innovative new drugs with little competition than on the pricing of drugs with close substitutes.

Best price continues to be misleadingly blamed for the fact that private insurers do a far poorer job in negotiating rebates and lowering prescription drug costs than Medicaid, even though they can now impose more restrictive, closed formularies as compared to state Medicaid programs.  Prior research from the 1990s is not particularly relevant to today’s pricing landscape and thus does not convincingly support any effort to eliminate or roll back the best price requirement. And because the best price provision in the Medicaid Drug Rebate Program continues to play an important role in lowering federal and state Medicaid prescription drug costs, it should be preserved.

Finally, as I have previously written, while there may be some special cases in which interactions with best price may create complexity for innovative pricing arrangements that can lower drug costs, any potential change to Medicaid best price should only be considered if it is highly targeted and narrowly tailored.  It should not inadvertently or intentionally undermine the best price requirement and thereby increase Medicaid drug costs.