Short-Term Funding Bill Keeps Government Open, Also Includes Sound Provision Reducing Federal and State Medicaid Drug Costs

On September 29, the President signed into law a fiscal year 2020 appropriations bill (H.R. 4378) that temporarily funds the federal government through November 21.  The bill also includes several short-term extensions of critical health provisions that were scheduled to expire: full Medicaid funding for Puerto Rico and the other territories, a delay in scheduled cuts to the Medicaid Disproportionate Share Program for hospitals, and federal funding for community health centers (also all effective through November 21).

While it received little attention, to offset the cost of these health extenders, the appropriations bill includes a highly sound provision to strengthen the Medicaid Drug Rebate Program.  The provision would effectively bar drug manufacturers from using “authorized generics” to lower the rebate amounts they otherwise must pay state Medicaid programs.  According to the Congressional Budget Office, the drug rebate provision would reduce federal Medicaid spending by $3.15 billion over the next ten years.  That translates into about $1.5 billion in state savings as well, based on the current federal and state share of Medicaid drug rebates.  The provision took effect on October 1.

As the Medicaid and CHIP Payment and Access Commission has noted, manufacturers that make their own generic version of their drugs (known as “authorized generics”) can artificially lower the Medicaid rebates they must pay under the Medicaid Drug Rebate Program.  Drug companies sometimes also sell the authorized generic version of their brand-name drug to a secondary manufacturer so that it can be distributed.  But if that secondary manufacturer 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 reducing the Medicaid rebates the manufacturer pays for its brand-name drug because the formula used to determine rebate amounts is based on the Average Manufacturer Price (AMP) and the calculation of the AMP incorporates the price of authorized generics.  In other words, manufacturers can game the rebate program through this approach and lower what they otherwise would owe to state Medicaid programs.

MACPAC has thus recommended eliminating authorized generics from the calculation of rebates.  (The Trump Administration’s fiscal year 2020 budget also includes a similar proposal.)  The short-term fiscal year 2020 appropriations bill would follow the MACPAC recommendation and also clarify that secondary manufacturers do not count as wholesalers for purposes of determining the AMP.  Because the authorized generics provision would produce federal savings significantly beyond what was needed to offset the cost of the health extenders, the excess savings were temporarily deposited into the Medicaid Improvement Fund where they can be used to pay for a longer-term extension of the expiring health provisions in November.

This is the second provision related to the Medicaid Drug Rebate Program that was enacted this year.  In April, Congress enacted a Medicaid bill (H.R. 1839) that included a provision to deter the problem of misclassification by drug manufacturers.  As we have previously explained, some manufacturers have inappropriately classified their brand-name drugs as generics in order to lower the rebates they must pay (as the minimum base rebate for generic drugs is 13% of AMP, compared to 23.1% for brand-name drugs).

The strong bipartisan support so far hopefully indicates that Congress and the Administration will enact other provisions to improve and strengthen the effective Medicaid Drug Rebate Program, which can then be used, for example, to offset the cost of longer-term extensions of the expiring health provisions in November.  That includes many of the Medicaid drug rebate provisions of the bipartisan drug pricing bill reported by the Senate Finance Committee in July.

For example, the Senate Finance Committee bill would raise the cap on total Medicaid drug rebate amounts.  Under current law, total Medicaid drug rebates on both brand-name and generic drugs cannot exceed 100 percent of the 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.  Elimination of the cap has been recommended by MACPAC and was also included in the Administration’s fiscal year 2020 budget.  The Senate Finance Committee drug pricing bill would increase the cap to at least 125 percent of AMP starting in fiscal year 2023 (with manufacturers potentially required to pay higher rebates depending on their past and future price increases).  The Congressional Budget Office estimates this provision would reduce federal Medicaid spending by $12.5 billion over 10 years.  That would likely result in $6 billion in state savings over the next decade as well.

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