Last night, the House Energy and Commerce Committee unveiled its recommendations for the House COVID-19 relief reconciliation bill, with a markup scheduled for February 11, 2021. One sound Medicaid provision would, as of January 1, 2023, eliminate the current cap on total drug rebates that manufacturers must pay state Medicaid programs, which would produce significant savings for both the federal government and the states.
The Medicaid Drug Rebate Program (MDRP) is highly effective in lowering federal and state Medicaid prescription drug costs. Under the rebate program, all drug manufacturers must provide rebates to the federal government and states as a condition of having their drugs covered by Medicaid. These rebates are substantial. According to the Medicaid and CHIP Payment and Access Commission (MACPAC), in federal fiscal year 2019, drug manufacturers paid $37.1 billion in total rebates to the federal government and the states, lowering Medicaid prescription drug costs by 55.7 percent. Similarly, according to the Congressional Budget Office (CBO), in 2015, the average total rebate paid by manufacturers to Medicaid on brand-name drugs was 66.9 percent of the Average Manufacturer Price (AMP), compared to 28.9 percent under rebates negotiated by Medicare Part D plans.
One critical component of the MDRP is the inflation-related rebate, under which manufacturers must pay additional rebates for both brand-name and generic drugs if their prices rise faster than general inflation. However, under current law, total Medicaid drug rebates on both brand-name and generic drugs cannot exceed 100 percent of the AMP. This limit undermines the effectiveness of the inflation-related rebate in discouraging manufacturers from instituting excessive annual price increases. When Congress originally enacted the limit as part of the Affordable Care Act, it did not anticipate the very large year-to-year price increases for both brand-name and generic drugs that have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.
As a result, MACPAC has recommended that Congress eliminate the rebate cap. Moreover, elimination of the Medicaid rebate cap has enjoyed strong bipartisan support. Last fall, by voice vote, the House passed Medicaid legislation extending postpartum coverage (H.R. 4996) that included an identical rebate cap elimination provision. In 2019, the Senate Finance Committee reported out bipartisan drug pricing legislation that included a similar provision (increasing the 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 Trump Administration’s fiscal 2020 budget also proposed to eliminate the rebate cap.
Previous CBO estimates of proposals eliminating or raising the rebate cap (here, here, and here) indicate that the House Energy and Commerce Committee provision would likely produce federal savings of at least $15 billion over 10 years. Based largely on the current federal and state share of Medicaid drug rebates, this translates to at least $7 billion in savings for states as well. As a result, the provision would provide combined federal and state savings of at least $22 billion over 10 years to help offset rising Medicaid drug costs over time.