In a new groundbreaking study, the Congressional Budget Office compared brand-name drug prices, net of rebates and discounts, across select federal programs and agencies including Medicaid, Medicare Part D and the Department of Veterans Affairs (VA).  It found that Medicaid gets the lowest net prices, far below that of Medicare Part D plans and well below even the prices negotiated by the widely touted VA Prime Vendor program.  The CBO drug pricing study demonstrates the effectiveness of the Medicaid Drug Rebate Program (MDRP) in reducing Medicaid prescription drug costs for the federal government and the states.  It also shows why the Medicaid rebate program should be strengthened, not weakened, in order to further help Medicaid programs address rising drug costs.  That is what the House COVID-19 relief reconciliation bill would do, by including a sound provision that would eliminate a cap on total rebates and thereby increase the rebates that drug manufacturers imposing excessive price increases must pay.

The CBO study takes a sample of top-selling Medicare Part D brand-name drugs and a sample of the highest-priced Medicare Part D brand-name drugs.  It then compares the 2017 weighted average price, net of rebates and discounts, across several federal programs or agencies that cover prescription drugs and/or directly purchase prescription drugs: Medicare Part D, Medicaid, the Federal Supply Schedule (FSS) available to federal agencies, the Federal Ceiling Price available to the “Big Four” agencies (the Department of Veterans Affairs, the Department of Defense, the Public Health Service and the Coast Guard), the VA Prime Vendor program (which negotiates on behalf of the VA health system) and the DOD TRICARE program (both its Prime Vendor program, which negotiates on behalf of the military health system and prices for its retail pharmacy network).

Key findings of the CBO study include:

• Medicaid had the lowest average price for brand-name drugs: 35 percent of the average Medicare Part D net price. The DOD TRICARE and VA Prime Vendor programs had the next lowest prices: 54 percent and 55 percent of Medicare Part D respectively.  The average Big Four price was 80 percent of Medicare Part D, the average TRICARE price for retail pharmacies was 80 percent and the FSS price was 93 percent.
• Medicaid had the lowest net price for specialty drugs. Specialty drugs are high-cost drugs that treat chronic, complex, or rare conditions that must typically be administered by a health professional and require special preparation or handling.  Based on CBO’s average net price data, the average net price in Medicaid for specialty drugs was 44 percent of the average Medicare Part D price.  It was also lower than the average price in the VA prime vendor program (47 percent of Medicare Part D).
• Medicaid and the VA had the lowest net price for high-cost drugs. Based on CBO’s price data, Medicaid had about the same average net price for high-cost drugs —51 percent of the average Medicare Part D price — as the average net price in the VA prime vendor program.
• Medicaid did far better for non-specialty drugs than any other federal program or purchaser examined by CBO. Based on the CBO price data, Medicaid’s average net price was 26 percent of the average Medicare Part D price.  The DOD prime vendor program had the next lowest average net price at 58 percent of Medicare Part D’s average price.

It is widely accepted that the Medicaid Drug Rebate Program provides far larger rebates than the rebates negotiated by Medicare Part D plans.  But the fact that Medicaid did considerably better than the VA overall and better on specialty drugs is particularly noteworthy.  The CBO study refutes the conventional wisdom that the VA, through its Prime Vendor program, obtains the lowest prices because it has significant negotiating leverage due to its national closed formulary for its entire integrated health system and because the VA system provides extensive training to medical residents, which can affect future prescribing patterns.  (It is also important to recognize that many drugs obtained by the VA are based on higher FSS and Big Four prices, not contract prices negotiated by the Prime Vendor program.)

The CBO study’s findings also indicate that Medicaid can get these better drug prices even though it has a largely open formulary.   In order to ensure beneficiary access, federal law requires that state Medicaid programs cover nearly all drugs.  Some states and other stakeholders have argued that Medicaid should shift to a more restrictive or closed formulary like the VA, Medicare Part D and private insurance use in order to increase negotiating leverage and allow Medicaid to do as well as other programs and purchasers.  (Tennessee’s controversial and risky Medicaid block grant waiver, approved by the Trump Administration in January, would allow such a closed formulary.)  The CBO study, however, makes clear that the Medicaid Drug Rebate Program can already obtain very low net prices without eliminating the current open formulary protection, which could lead to state Medicaid programs unduly restricting beneficiaries’ access to needed prescription drugs.

Other important findings from the CBO study include:

• Medicaid also obtained the lowest net price using a different metric: rebates as a share of retail prices. The CBO study also provides 2017 data on retail prices in Medicaid for brand-name drugs, specialty drugs, non-specialty drugs, and high-price drugs and the amount of the Medicaid drug rebates relative to those prices.
  • Brand-name drugs overall: Medicaid obtained average rebates equal to 77 percent of the average Medicaid retail price. In comparison, Medicare Part D rebates were equal to 35 percent of the Medicare retail price (with Medicare retail prices slightly higher than those in Medicaid).  VA Prime Vendor program discounts were equal to about 63 percent of the Medicaid retail price.  (Because the VA purchases drugs directly for use in its health system, there is no VA retail price.)
  • Specialty drugs: Medicaid obtained average rebates equal to 60 percent of the average Medicaid retail price. In comparison, Medicare Part D rebates were equal to only 12 percent of the Medicare retail price and VA Prime Vendor program discounts were equal to about 58 percent of the Medicaid retail price.
  • High-price drugs: Medicaid obtained average rebates equal to 53 percent of the Medicare retail price. In comparison, Medicare Part D rebates were equal to only 11 percent of the Medicare retail price and VA Prime Vendor program discounts were equal to about 53 percent of the Medicaid retail price, about the same as under Medicaid.
  • Non-specialty drugs: Medicaid obtained rebates equal to 86 percent of the retail price. In comparison, Medicare Part D rebates were equal to only 47 percent of the Medicare retail price and VA Prime Vendor program discounts were equal to about 66 percent of the Medicaid retail price.
• The gap between Medicaid net prices and prices for other federal programs and agencies was likely even larger. Due to data limitations, CBO does not include supplemental rebates negotiated by state Medicaid programs (that are on top of the federally required rebates), although supplemental rebates constitute a small share of total rebates.  Moreover, the VA prices used by CBO do not include the costs of dispensing those drugs while the Medicaid prices reflect amounts retained by pharmacies to reimburse them for the cost of dispensing the drugs to beneficiaries.  CBO notes that removing “the amount retained by pharmacies from the average net price in Medicaid would reduce that price and widen the gap between the average price in Medicaid and the average prices paid by VA and DoD.”
• Medicaid is doing a better job of lowering its drug costs over time. An earlier CBO study found that in 2003, consistent with conventional wisdom, the VA obtained significantly lower net prices than Medicaid.  CBO attributes Medicaid’s subsequent ability to obtain lower prices than the VA to two factors.  First, the Affordable Care Act made significant improvements to the MDRP, including increasing the minimum rebate and extending the MDRP to Medicaid managed care.  Second, the size of inflation-related rebates paid by manufacturers (discussed further below) increased as drug prices rose much faster than general inflation.  Because the earlier CBO study was conducted before the implementation of Medicare Part D, it compared prices relative to the Federal Supply Schedule rather than to Part D prices.  In 2003, the average VA price was 79 percent of the FSS and the average Medicaid price was 96 percent of the FSS.  But in 2017, the average VA price was 60 percent of the FSS and the average Medicaid net price equaled 37 percent of the FSS.  As a share of the FSS, the average Medicaid net price fell by 59 percentage points between 2003 and 2017.
• Both the Medicaid best price requirement and the inflation-related rebate are essential contributors to the Medicaid rebate program’s increased success. The Medicaid Drug Rebate Program (MDRP) has two components for brand-name drugs.  First, manufacturers must pay a base rebate equal to a minimum rebate of 23.1 percent of the Average Manufacturer Price (AMP) or the AMP minus the “best price” provided to most other purchasers, whichever is greater.  Second, manufacturers must pay an additional inflation-related rebate if prices rise faster than general inflation.  (For generic drugs, manufacturers must pay a base rebate equal to 13 percent of the AMP and are also subject to an inflation-related rebate.)

According to CBO, the base rebate and the inflation-related rebate contributed roughly equally to the total average Medicaid rebate of 77 percent (relative to the average Medicaid retail price, which is slightly above the AMP).  This means that the best price, not the minimum rebate of 23.1 percent of AMP, was often setting the base rebate for the samples of drugs analyzed by CBO.  This was also the case for specialty drugs (where the base rebate equaled 29 percent of the retail price), high-price drugs (where the base rebate equaled 29 percent of the retail price) and non-specialty drugs (where the base rebate equaled 43 percent of the retail price).  As a result, if the best price requirement were to be weakened or eliminated, that would drive up net Medicaid drug prices significantly.  For example, a recent rule changing how manufacturers report best price under the MDRP, which was finalized by the Trump Administration at the end of December 2020, could lead to lower rebates and higher Medicaid drug costs.  That rule should be revisited by the Biden Administration before one key provision allowing drug manufacturers to report variable best prices takes effect in 2022.

CBO also finds that the inflation-related rebate was equal to about 31 percent of the retail price for specialty drugs, 24 percent for high-price drugs and 43 percent for non-specialty drugs.  As noted, the inflation-related rebate accounted for roughly half the total average rebate of 77 percent of the retail price for brand-name drugs overall.  Strengthening the inflation-related rebate would thus further lower net drug prices for the Medicaid program.  The House COVID-19 relief reconciliation bill, for example, would eliminate a cap on total Medicaid rebates. The cap allows manufacturers instituting excessive price increases to avoid paying billions of dollars in rebates they otherwise would have been required to pay the federal government and the states.