CBO Estimates Confirm Lifting Medicaid Drug Rebate Cap Results in Significant Federal and State Savings

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On Monday, February 22, the House Budget Committee plans to mark up the House COVID-19 relief reconciliation bill, with the full House possibly voting on the bill later in the week.  As I have previously explained, one sound Medicaid provision — section 3107 of the bill —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 prescription drug savings for both the federal government and the states.

According to Congressional Budget Office (CBO) estimates, lifting the rebate cap under the Medicaid Drug Rebate Program (MDRP) would reduce federal Medicaid spending by $15.9 billion over the next 10 years (2021-2030).  Based largely on the current federal and state share of Medicaid drug rebates, I estimate that this would lead to about $7.6 billion in savings for states as well.  As a result, the provision would provide combined federal and state savings of about $23.5 billion over 10 years to help offset rising Medicaid drug costs over time.  (CBO also includes estimates for the 2021-2031 budget window: $18.5 billion in federal savings, which translates to $8.9 billion in state savings and combined savings of $27.3 billion.)

In a separate analysis, CBO finds that in 2017, because of its highly effective Medicaid rebate program, Medicaid obtained the lowest net prices for brand-name drugs relative to other federal programs.  Medicaid prices, net of rebates, were well below those in Medicare Part D and even below the prices negotiated by the Department of Veteran Affairs.  The rebate program, however, could be even more effective if the current cap on total drug rebate were eliminated as the House reconciliation bill would do.

Here’s why.  One major element of the MDRP is its 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.  The intent of the inflation-related rebate is to discourage manufacturers from raising their prices excessively.  However, under current law, total Medicaid drug rebates on both brand-name and generic drugs cannot exceed 100 percent of the Average Manufacturer Price.  The cap effectively allows some drug manufacturers that have imposed very large price increases over time to not pay rebates equal to the full difference between their price increases and inflation, as the inflation-related rebate generally requires.  CBO estimates that in 2019, this rebate cap allowed drug manufacturers to avoid paying more than $3 billion in rebates that they would otherwise have been required to pay to the federal government and the states.

As a result, the Medicaid and CHIP Payment and Access Commission (MACPAC) has previously recommended that Congress eliminate the rebate cap.  MACPAC offers this succinct rationale for its recommendation:

“Removing the rebate cap would allow the inflationary rebate to achieve its full effect and lead to higher rebates on drugs with large price increases, which would reduce the net price for these products and create savings for Medicaid.  These savings would relieve some fiscal pressure on states by allowing them to maintain the same level of drug coverage at a lower cost.

Removing the rebate cap would also reinforce the downward pressure that the Medicaid inflationary rebate already exerts on price increases.  A drug manufacturer is likely to reach the rebate cap only if it increases its price substantially over time and therefore has to pay a large inflationary rebate.  Removing the rebate cap could change the calculation for manufacturers considering a large increase in the market price of their products because there would be no limit on the Medicaid rebates and larger price increases would result in larger Medicaid rebate obligations for manufacturers.  Manufacturers would have the incentive to lower list prices on current drugs as well as curtail price increases on future drugs.”

The House COVID-19 relief reconciliation bill’s provision to lift the Medicaid drug rebate cap is thus a very sound provision that should be retained as the bill proceeds through Congress.  It builds on the successful Medicaid Drug Rebate Program and ensures that Medicaid would obtain even lower net prices than it does today.  That would help both the federal government and the states better address rising drug costs.


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