Congress Could Consider Medicaid and CHIP Drug Pricing Provisions

The Inflation Reduction Act (P.L. 117-169), signed into law on August 16, 2022, includes historic Medicare drug pricing provisions such as a requirement for Medicare to directly negotiate prices with drug manufacturers for certain high-cost drugs and a requirement that drug manufacturers pay rebates to Medicare if their prices rise faster than inflation.

Unfortunately, the Inflation Reduction Act did not include any drug pricing provisions directly affecting Medicaid and the Children’s Health Insurance Program (CHIP).  As Congress looks ahead to a “lame duck” session after this year’s midterm elections, it could consider two modest but sound Medicaid and CHIP drug pricing provisions that were previously passed by the House.  They would reduce prescription drug costs for both the federal government and the states and increase CHIP beneficiaries’ access to needed prescription drugs.

Applying the Medicaid Drug Rebate Program to Separate State CHIP Programs

The budget reconciliation bill originally passed by the House (H.R. 1376) in November 2021 included a provision — section 30801(c) — which would have extended the highly successful Medicaid Drug Rebate Program to separate state CHIP programs, effective January 1, 2024.  As I have previously explained, drug manufacturers must provide rebates to the federal government and states as a condition of having their drugs covered by Medicaid.  The rebates apply to both fee-for-service and to managed care.

These Medicaid drug rebates are substantial: data from the Medicaid and CHIP Payment and Access Commission (MACPAC) indicate that these rebates lowered gross Medicaid prescription drug costs by 54.6 percent in 2020.  Moreover, a groundbreaking 2021 Congressional Budget Office study found that compared to other federal programs and agencies (including the Department of Veterans Affairs), for the top-selling and highest-cost Medicare Part D drugs, Medicaid obtained the lowest prices, net of rebates and discounts.

Under CHIP, states can use federal CHIP funding to expand children’s coverage through Medicaid, through a separate state program, or through a combination of both.  While the Medicaid Drug Rebate Program applies to CHIP-funded Medicaid expansions, it does not apply to separate state CHIP programs.

It is likely that separate state CHIP programs obtain far smaller rebates from manufacturers than what manufacturers now pay under the Medicaid rebate program.  Separate state CHIP programs are small in size: according to MACPAC, only about 3.8 million children were enrolled in this type of CHIP program at some point in 2020, which accounted for only 42 percent of total CHIP enrollment.  In addition, over half of total separate state CHIP enrollment was in just six states.  Moreover, while data on separate state CHIP rebates is not readily available because any drug rebates are now primarily being negotiated by managed care plans on behalf of CHIP programs and are not reported separately, federal Medicaid and CHIP spending data from one state is illustrative.  In Alabama, which does not use managed care in Medicaid and CHIP, rebates negotiated by the state’s CHIP program reduced gross CHIP drug spending by only 22.9 percent in 2020 (compared to a 63.4 reduction in its Medicaid drug costs under the Medicaid rebate program).

If the Medicaid Drug Rebate Program were to be applied to all separate state CHIP programs, drug manufacturers would be required to pay the same rebates they pay under Medicaid.  That would certainly result in reductions in net federal and state CHIP prescription drug costs.  (Because the regular, average federal CHIP matching rate is 70 percent, states would accrue, on average, 30 percent of the savings).  This would have the benefit of reducing budgetary pressures on states and in turn, making it less likely that states have to cut their CHIP programs over time.

In addition, extending the Medicaid rebate program to separate state CHIP programs would also likely increase children’s access to prescription drugs.  Under the Medicaid rebate program, state Medicaid programs must cover nearly all FDA-approved drugs.  While all separate state CHIP programs cover prescription drugs, they are not subject to the same open formulary requirement that applies in Medicaid.  Some states include Medicaid’s Early and Periodic, Screening, Diagnostic and Treatment (EPSDT) benefit as part of their separate CHIP benefit packages.  This ensures that CHIP beneficiaries have access to needed services, including prescription drugs, even if they are not otherwise covered — but the large majority of states do not.  As a result, to the extent that separate state CHIP programs currently use restrictive drug formularies, applying the Medicaid rebate program to separate state CHIP programs would likely result in greater access to needed medications for children who are enrolled in CHIP.  (This protection would also benefit pregnant women, to the extent they are covered by some separate state CHIP programs and such programs impose restrictive drug formularies.)

Mandatory Drug Pricing Surveys for Medicaid-Participating Pharmacies

Section 30741(h) of the budget reconciliation bill originally passed by the House in November 2021 would have required Medicaid-participating retail community pharmacies to respond to an ongoing nationwide National Average Drug Acquisition Cost (NADAC) survey, conducted by a vendor on behalf of the Centers for Medicare and Medicaid Services, if such pharmacies are included in the monthly survey’s representative sample of retail community pharmacies.

Medicaid pharmacy reimbursement consists of two parts: the cost of the drug itself, known as the ingredient cost, and a professional dispensing fee.  Federal regulations require that state Medicaid programs base their ingredient cost payment methodology on “actual acquisition cost,” which is the price a pharmacy pays to acquire a drug dispensed to a Medicaid beneficiary.  State Medicaid programs can use NADAC pricing survey data as one source to determine this actual acquisition cost but states can also use their own pharmacy drug pricing surveys or other pricing benchmarks such as the Average Manufacturer Price.

Retail community pharmacies, however, are not required to respond to the NADAC survey.  This may skew the results of the survey if respondents are not representative of pharmacies nationally.  For example, initial data from when the NADAC survey was first implemented indicated that larger chain pharmacies, who likely obtain their drugs at lower prices, were less likely to respond to the NADAC survey than smaller independent pharmacies, who likely obtain their drugs at higher prices.  That would likely have the effect of raising the NADAC price for a drug and lead to states setting higher reimbursement rates that benefit chain pharmacies and other large pharmacies (and offer them a higher margin) when such pharmacies dispense a prescription drug to a Medicaid beneficiary.

Section 30741(h) would require retail community pharmacies to participate in the NADAC survey, enforced by the imposition of civil monetary penalties for failure to respond (with an exemption for pharmacies that make a good faith effort to respond on a timely basis).  In addition, states would be required to make NADAC survey response a condition of participation (in both fee-for-service and managed care).  The provision would also make several improvements to the survey itself, such as collecting separate average drug acquisition costs for independent retail pharmacies and chain pharmacies and information on price concessions (including on and off invoice discounts and rebates) and professional dispensing fees paid.

Together, this provision would better ensure a representative sample of pharmacies and a more accurate average acquisition cost for each drug.  As a result, Medicaid pharmacy reimbursement would likely be increasingly set at amounts that are more appropriately in line with pharmacies’ actual acquisition costs, especially for larger chain pharmacies.  The mandatory survey response provision would thus produce both federal and state Medicaid prescription drug savings over time.  (This provision would have taken effect at the start of the first calendar year quarter that begins at least 18 months after the date of enactment.)

Other Steps

Beyond these two modest Medicaid and CHIP drug pricing provisions, Congress and the Biden Administration could also consider broader proposals to lower federal and state Medicaid and CHIP prescription drug costs.  For example, as I have previously written, such steps could include the MACPAC recommendation to increase rebates for certain accelerated approval drugs, in order to help address rising Medicaid drug costs and to encourage manufacturers of accelerated approval drugs to complete their post-market confirmatory clinical trials.  It could also include increasing the minimum rebate that drug manufacturers must pay state Medicaid programs.  Such an increase could be relatively small and apply to all drugs or it could be larger but targeted to certain new drugs with excessive launch prices.

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