Trump Administration Withdraws Harmful Drug Rebate Safe Harbor Rule

On July 10, the Trump Administration announced that it would withdraw a 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.  This is a highly welcome move.  As we have explained since the proposed rule was unveiled, if it had been finalized, the rule would have seriously harmed Medicaid.  Instead of helping state Medicaid programs better address rising prescription drug costs, the rule would have increased net federal and state Medicaid drug spending and would likely have ultimately led to states making cuts to their Medicaid programs that adversely affect low-income beneficiaries including children and families.

As our public comments pointed out, most states currently rely on Medicaid managed care plans to negotiate voluntary supplemental rebates on behalf of their enrollees, in addition to those required under the highly effective Medicaid Drug Rebate Program.  Yet, the proposed regulation would have effectively eliminated those rebates.  As we have written, that, in turn, would have increased federal and state Medicaid drug spending by $10.5 billion over the next 10 years, based on estimates from the Congressional Budget Office.  Facing these higher costs, states would have either had 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.

At the same time, the primary policy rationale cited in support of the proposed regulation did not even apply to MedicaidThe Administration had argued that consumers can face higher out-of-pocket costs if their deductible and co-insurance amounts are based on list prices, rather than prices net of rebates. The Administration claimed that its regulation would result in current rebates being converted to “point-of-sale” rebates under which negotiated discounts fully flow through to consumers at the pharmacy counter and reduce out-of-pocket costs for beneficiaries.  But while that could be true of Medicare Part D beneficiaries in some cases, that would not be the case in Medicaid.  Medicaid beneficiaries generally pay only nominal co-payments irrespective of the price of individual drugs.

Notably, pharmaceutical manufacturers seem the most upset about the Trump Administration’s decision to withdraw the proposed rule.  That’s a clear sign of who would have likely benefited if the rule has been finalized.  In order to actually help state Medicaid programs address the cost of prescription drugs, Congress and the Administration should instead consider sound proposals to strengthen the Medicaid Drug Rebate Program including:

Eliminating the cap on total Medicaid rebate amounts. Under current law, total Medicaid drug rebates on both brand-name and generic drugs cannot exceed 100 percent of the Average Manufacturer Price (AMP).  This limit, however, undermines the effectiveness of Medicaid’s inflation-related rebates — under which manufacturers must pay an additional rebate if the prices for their drugs rise faster than general inflation — in discouraging manufacturers from instituting excessive annual price increases. When Congress originally enacted the 100 percent of AMP limit, it had not anticipated the very large year-to-year price increases for both brand-name and generic drugs that have occurred in recent years.  This proposal has been recently recommended by the Medicaid and CHIP Payment and Access Commission (MACPAC) and was also included in the Administration’s fiscal year 2020 budget.  According to MACPAC, it would produce $15-$20 billion in federal savings over 10 years and $7-$10 billion in state savings.

Barring manufacturer gaming using “authorized generics” to lower rebate amounts. As MACPAC has noted, manufacturers that make their own generic version of their drugs (known as “authorized generics”), which 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 thus recommends eliminating these types of authorized generic transactions from the calculation of rebates

Increasing the minimum rebate for new brand-name drugs with excessive launch prices. To help state Medicaid programs address the cost of new brand-name drugs, such as specialty drugs, with very high launch prices, the percentage for the minimum Medicaid rebate could be increased above its current level of 23.1 percent of AMP.  The percentage point increase in the minimum rebate above 23.1 percent of AMP could escalate — that is, get increasingly larger — as the launch prices exceed certain dollar thresholds.  This would not only allow Medicaid programs to better afford the new brand-name drugs with launch prices of tens of thousands or hundreds of thousands of dollars but also help deter manufacturers from setting such high initial prices.

Increasing inflation-related rebates to discourage excessive price increases. To further deter the increasingly common tactic of manufacturers substantially hiking the price of existing drugs, the Medicaid inflation-related rebates for both brand-name and generic drugs could be further increased if annual price increases exceed certain percentage thresholds.  Manufacturers could be subject to an escalating inflation-related rebate.  In other words, manufacturers would owe an inflation-related rebate that would equal the difference between the annual price increase and general inflation, plus an additional number of percentage points.  The percentage point increase would be larger as the annual percentage pricing increase rises.

Edwin Park is a Research Professor at the Georgetown University McCourt School of Public Policy.