News and Notes on Medicaid Prescription Drug Pricing and Coverage Issues

Unfortunately, Congress has largely shelved drug pricing legislation, including sound proposals to lower federal and state Medicaid drug costs, as it focuses on legislation responding to the ongoing COVID-19 health and economic crisis.  Nevertheless, there have some developments in the area of Medicaid prescription drug pricing and coverage over the last few months that are worth highlighting:

The Medicaid matching rate increases in COVID-19 response legislation would reduce state “clawback” payments required under Medicare Part D.

Prior to implementation of the Medicare Part D outpatient drug benefit in 2006, seniors and people with disabilities eligible for both Medicare and Medicaid received their drug coverage through Medicaid.  Medicare Part D requires state Medicaid programs to continue to contribute a portion of the cost of Part D coverage for dual eligibles.  The formula for these clawback payments is intended to currently approximate 75% of what states would have spent on their share of prescription drug costs for dual eligibles in Medicaid and as a result, the payment formula is based, in part, on the federal Medicaid matching rate (known as the Federal Medical Assistance Percentage or FMAP).  This means the temporary FMAP increase of 6.2 percentage points included in the Families First COVID-19 response legislation (P.L. 116-127) has the effect of lowering states’ clawback payments from January 1, 2020 through the end of the declared public health emergency.  Based on projections from the Medicare Trustees Report, assuming that the public health emergency extends through June 2021 and consistent with the Congressional Budget Office (CBO) estimate of the Families First Act, I estimate that states would have to pay about $2.8 billion less in clawback payments relative to prior law.  (The Medicare Trustees previously expected that states would pay about $19.3 billion in clawback payments between January 1, 2020 and June 30, 2021).  If the further FMAP increase included in the House-passed HEROES Act (H.R. 6800) is also enacted into law — which provides a FMAP increase totaling 14 percentage points (including the Families First increase) from July 1, 2020 through June 30, 2021 — states would have to pay a total of about $5.1 billion less in clawback payments from January 2020 through June 2021.  This would assist states facing sharply higher Medicaid costs from higher enrollment and overall budget deficits due to the COVID-19 health and economic crisis.

Updated Congressional Budget Office (CBO) estimates of the Medicaid provisions in bipartisan Senate drug pricing legislation continue to show significant state savings.

In March 2020, CBO issued updated estimates of the Prescription Drug Pricing Reduction Act of 2019 (S. 2543), bipartisan legislation sponsored by Senate Finance Committee Chair Chuck Grassley and Ranking Member Ron Wyden that was reported out of the Senate Finance Committee in July 2019.  As I have previously explained, the legislation includes a number of sound provisions which would strengthen the effective Medicaid Drug Rebate Program and enhance administration of the Medicaid prescription drug benefit, lowering both federal and state Medicaid costs.  CBO now expects the legislation to lower federal Medicaid spending by $15 billion over the next 10 years.  Based largely on the current federal and state share of Medicaid drug rebates, I estimate that this translates into about $7.3 billion in savings for states as well over 10 years.  (The federal and state Medicaid savings are different than under the original CBO estimate for S. 2543 due to the change in the 10-year budget window and enactment in October 2019 of a provision to increase Medicaid rebates for authorized generics included in S. 2543.)  Enacting the Medicaid drug rebate and prescription drug benefit provisions included in S. 2543 would provide some short-term state Medicaid savings to help states address higher Medicaid costs and close budget deficits related to the COVID-19 crisis.  Most importantly, such savings would help avert other Medicaid budget cuts that significantly harm beneficiaries by reducing access to needed care.

The Medicaid Drug Rebate Program continues to generate far greater savings than under the rebates negotiated by private Medicare Part D plans.

As I have written, the Medicaid Drug Rebate Program is highly effective.  For example, according to the Medicaid and CHIP Payment and Access Commission, in federal fiscal year 2018, drug manufacturers paid $36.2 billion in Medicaid prescription drug rebates to the federal government and the states, lowering Medicaid prescription drug costs by 59.5 percent.  In contrast, while Medicare Part D rebates have increased in recent years, data from the 2020 Medicare Trustees Report issued in April 2020 shows that the rebates negotiated between private insurers and drug manufacturers lowered Medicare Part D costs by only 25 percent in 2018.  In fact, the gap between Medicaid and Medicare Part D rebate amounts has grown between 2016 and 2018.  (In 2016, Medicaid rebates lowered gross Medicaid drug costs by 51.3 percent according to MACPAC data.  Rebates negotiated by private plans lowered Medicare Part D drug costs by 19.9 percent, Medicare Trustees data shows.)

A new Kaiser Family Foundation Medicaid prescription drug survey may help states identify Medicaid prescription drug savings that do not harm beneficiaries and help close state budget deficits.

At the end of April 2020, the Kaiser Family Foundation issued the results of a survey of state Medicaid programs related to a number of Medicaid drug pricing and coverage issues.  (All states and the District of Columbia responded to at least some survey questions except for Utah.)  For example, the survey finds that an increasing number of states are addressing the problem of spread pricing, under which pharmacy benefit managers (PBMs) have been charging Medicaid managed care plans for pharmacy claims costs well in excess of the actual costs of reimbursing pharmacies for drugs dispensed to beneficiaries, net of any supplemental rebates the PBMs negotiate with drug manufacturers.  The PBMs retain the difference, known as the “spread,” as profit.  That, in turn, artificially inflates the capitation payments that states must pay managed care plans, resulting in higher overall federal and state Medicaid costs.  But the survey notes only 17 states have prohibited or plan to prohibit spread pricing outright.  In addition, the survey finds that only 16 states require Medicaid managed care plans to use a uniform preferred drug list (PDL).  Such a uniform list across both fee-for-service and managed care, however, can maximize negotiating leverage with drug manufacturers and increase supplemental rebate amounts to further lower Medicaid drug costs (especially if the state directly negotiates supplemental rebates on behalf of all managed care enrollees as well).  State Medicaid programs should closely examine the survey to see whether they have adopted policies that other states already have instituted, which could produce savings and help address budget deficits without cutting beneficiaries’ access to needed care, including prescription drugs.

My recent Health Affairs blog post warns that efforts to promote alternative payment arrangements could undermine the best price requirement in the Medicaid Drug Rebate Program, sharply increase Medicaid drug costs and lead to cuts reducing beneficiary access to needed care.

In April 2020, Andrea Noda of Arnold Ventures and I wrote about how drug manufacturers and some federal policymakers are pushing for legislative changes to roll back the Medicaid best price requirement (which ensures that Medicaid obtains discounts at least as large as those available to most private-sector payers), arguing that it poses an obstacle to more widespread adoption of arrangements like outcome-based and pay-over-time contracts.  The blog explains the substantial value of best price in lowering state Medicaid prescription drug costs, how some federal proposals would significantly weaken best price and sharply raise Medicaid drug costs, how state Medicaid programs already have considerable flexibility to adopt alternative payment arrangements, and how there are reasonable regulatory alternatives to facilitate such arrangements without undermining best price.        

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