CBO Estimates Indicate Proposed Drug Rebate Safe Harbor Rule Would Increase Federal and State Medicaid Costs by $10.5 Billion Over Next Decade

On May 2, as part of its new baseline, the Congressional Budget Office (CBO) issued an analysis of the impact on Medicaid of the Trump Administration’s proposed rule to eliminate the safe harbor in the federal anti-kickback law for rebates negotiated by pharmacy benefit managers (PBMs) on behalf of Medicaid managed care plans and Medicare Part D plans.  Based on the CBO analysis, we estimate that the proposed rule would increase total federal and state Medicaid spending by about $10.5 billion over the next ten years: $7 billion in higher federal Medicaid drug costs and $3.5 billion in the state share of Medicaid drug costs.

As we explained in our public comments, the proposed rule raises serious concerns because it would likely harm the Medicaid program, raise federal and state Medicaid prescription drug costs, and could ultimately lead to states making cuts to their Medicaid programs that adversely affect low-income beneficiaries including children and families.  According to CBO, if finalized and fully implemented, the proposed rule would increase federal Medicaid spending by an estimated $7 billion over the next ten years (2020-2029) due to two factors.

First, the rule would effectively replace the current rebates that drug manufacturers provide in Medicare Part D plans with so-called “chargeback” discounts.  That would reduce the mandatory rebates that drug manufacturers must provide to Medicaid under the highly effective Medicaid Drug Rebate Program (MDRP) because such chargebacks in Part D would likely have the effect of lowering the Average Manufacturer Price (AMP) of drugs, which helps determine the amount of mandatory Medicaid rebates.  The federal share of mandatory drug rebates would then decline by about $6 billion over ten years, relative to current law.  Second, the rule would effectively end the voluntary supplemental rebates that Medicaid managed care plans negotiate with manufacturers on behalf of their enrollees on top of those required under the MDRP.  CBO expects that states would only be able to replace three-quarters of those current rebates with rebates that they directly negotiate with manufacturers, which would continue to be permitted.  Federal spending would therefore increase by $1 billion over ten years.

While the CBO analysis does not include an estimate of the rule’s impact on state Medicaid spending, we can extrapolate such an estimate based on the existing federal and state share of mandatory rebates under the MDRP and of supplemental rebates negotiated in Medicaid managed care.  Based on Medicaid expenditure data from the Centers for Medicare and Medicaid Services, we estimate that the reduction in mandatory rebates would increase state costs by about $2.9 billion over ten years (as the state share of mandatory rebates was 32.5 percent in 2017).  We also find the loss of supplemental rebates in Medicaid managed care would increase state costs by about $600 million over ten years (as the state share of such rebates was 38 percent in 2017).

Facing these higher costs, states would either have to contribute more of their own funding to Medicaid programs or, as is more likely, respond by instituting programmatic cuts harming children, families and other low-income beneficiaries, such as cuts to Medicaid eligibility, benefits and provider payments that reduce access to needed care including to prescription drugs.  Because of the harm the proposed rule poses to state Medicaid programs, our public comments recommended that in any final regulation, the Administration should not extend the proposed safe harbor changes to Medicaid managed care — that is, the Administration should retain the existing safe harbor in the federal anti-kickback law for rebates negotiated by Medicaid managed care plans — irrespective of whatever changes are ultimately applied to Medicare Part D.

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