On March 11, the Trump Administration released its fiscal year 2020 budget.  As my colleague Andy Schneider has written, the Administration budget plan would repeal the Affordable Care Act’s Medicaid expansion, impose a per capita cap or block grant on the rest of the Medicaid program, require all states to adopt onerous work reporting requirements and make other Medicaid cuts adversely affecting beneficiaries.  Altogether, the budget would cut federal Medicaid spending by $1.5 trillion — or by 27 percent — over the next ten years, relative to current law.

While receiving considerably less attention, the budget, as detailed here, also includes several legislative proposals related to the highly effective Medicaid Drug Rebate Program:

• Establish five-state “opt-out” demonstration project. As expected, the fiscal year 2020 budget retains a damaging proposal from last year’s budget to establish 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 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, especially vulnerable populations such as 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 imposed solely to limit costs.

• Eliminate cap on total Medicaid drug rebate amounts. The budget would eliminate the Affordable Care Act’s limit on total Medicaid drug rebates on both brand-name and generic drugs (set at 100 percent of the Average Manufacturer Price or AMP).  This cap undermines the effectiveness of Medicaid’s inflation-related rebates — under which drug manufacturers must pay additional rebates if their drug prices rise faster than general inflation — in discouraging manufacturers from instituting excessive annual price increases.  When Congress enacted the rebate cap, it did not anticipate the very large year-to-year price increases for both brand-name and generic drugs that have occurred in recent years.  Elimination of the rebate cap, which we have recommended, would ensure that state Medicaid programs receive rebates equal to the full amount of such percentage price increases in excess of general inflation.  That would have the benefit of helping state Medicaid programs better address excessive annual drug price increases while also seriously deterring manufacturers from instituting such increases.  The Medicaid and CHIP Payment and Access Commission (MACPAC) is also expected to recommend this sound improvement in an upcoming report to Congress.

• Address manufacturers’ misclassification of drugs which lower their rebate obligations. Some drug manufacturers have inappropriately and inaccurately classified some of their brand-name drugs as generics in order to reduce how much they pay in rebates.  The minimum rebate for generic drugs is 13 percent of AMP while the minimum rebate for brand-name drugs is 23.1 percent of AMP.  Moreover, generic drugs are not subject to the “best price” requirement like brand-name drugs are, under which manufacturers must pay a base rebate equal to the higher of the minimum rebate or the largest discount provided to other payers.  The Administration’s budget would codify existing regulations to make clear how manufacturers should classify drugs as either brand-name or generic.  It would also increase the civil monetary penalty amounts that can be imposed on drug manufacturers for providing false or late reporting of pricing and other information related to the Medicaid Drug Rebate Program.  In addition, it would explicitly extend such penalties to manufacturers that misclassify a brand drug as a generic drug or make other false drug product submissions.  As we have written, this is generally consistent with a MACPAC recommendation and a similar provision was also included in a bipartisan bill (H.R. 7217) previously passed overwhelmingly by the House of Representatives in December 2018.

• Prevent manufacturers from using authorized generics to lower their rebate obligations. As we have noted, MACPAC has found that drug manufacturers that make their own generic version of their drugs (known as “authorized generics”) can artificially lower the Medicaid rebates they pay.  Drug companies sometime sell the authorized generic version of their brand-name drug to another manufacturer so that it can be distributed.  But if that second company has a corporate relationship with the brand-name drug company (for example, they have the same parent company), the brand-name company may intentionally charge a much lower “transfer” price than it would otherwise charge another manufacturer or wholesalers.  This would have the effect of lowering the Medicaid rebates the manufacturer pays for its brand-name drug because the formula used to determine rebate amounts takes into account the price of authorized generics.  In other words, manufacturers can game the rebate program through this approach and reduce the rebates they otherwise would owe to state Medicaid programs.  MACPAC has recommended eliminating these types of authorized generic transactions from the calculation of rebates.  The Administration budget would similarly clarify that a manufacturer must exclude authorized generics from its AMP in order to close this loophole.

While the Administration’s damaging demonstration project should be fully rejected by policymakers, it is a very welcome move that the Administration is now supporting several sound improvements to the Medicaid Drug Rebate Program which could help states better address rising Medicaid prescription drug costs and ensure continued access to needed prescription drugs for low-income Medicaid beneficiaries such as children and families.  The Administration should consider other proposals which would further strengthen the Medicaid Drug Rebate Program, as we have recommended here.