Under the highly effective Medicaid Drug Rebate Program (MDRP), drug manufacturers must provide substantial rebates to the federal government and states as a condition of having their drugs covered by Medicaid.  For brand-name drugs, the rebates apply to  both fee-for-service and Medicaid managed care and consist of two mandatory components.  First, under a basic rebate, manufacturers must pay an amount equal to the greater of a minimum rebate of 23.1 percent of the average price paid by wholesalers for drugs (known as the Average Manufacturer Price or AMP) or the largest “best price” discount provided to most other private purchasers.  Second, manufacturers must also pay an additional rebate if their prices rise faster than general inflation.  In addition to the rebates required under federal law, states may negotiate voluntary supplemental rebates from manufacturers.

Due to the success of the rebate program, a groundbreaking 2021 Congressional Budget Office study found that compared to other federal programs and agencies, including the Department of Veterans Affairs, Medicaid obtained the lowest prescription drug prices, net of rebates and discounts.  Data from the Medicaid and CHIP Payment and Access Commission (MACPAC) show that Medicaid rebates reduced overall gross federal and state Medicaid prescription drug spending by nearly 53 percent — or $42.5 billion — in fiscal year 2021.

On March 9, the Biden Administration released its budget plan for fiscal year 2024.  The budget includes several Medicaid and CHIP provisions related to the Medicaid Drug Rebate Program:

Extending the Medicaid Drug Rebate Program to Separate State CHIP Programs. 

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 MDRP applies to CHIP-funded Medicaid expansions, it does not apply to separate state CHIP programs.  The Biden Administration’s fiscal year 2024 budget proposes to extend the rebate program to separate state CHIP programs.

Separate state CHIP programs (or CHIP managed care plans on their behalf) are likely able to only negotiate far smaller rebates from manufacturers on a voluntary basis than what manufacturers now pay under the Medicaid rebate program.  Separate state CHIP programs are small in size: according to MACPAC, only about 3.4 million children were enrolled in this type of CHIP program at some point in fiscal year 2021, which accounted for only 39 percent of total CHIP enrollment.  In addition, nearly half of total separate state CHIP enrollment was in just six states.  Moreover, while overall 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 MDRP were applied to all separate state CHIP programs, as the Biden Administration budget proposes, 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, make it less likely that states would have to cut their separate state CHIP programs and more likely they would be able to further expand and improve their CHIP programs over time.  According to the Office of Management and Budget (OMB), extending the rebate program to separate state CHIP programs would produce federal savings of $2.3 billion over the next ten years.

In addition, extending the MDRP to separate state CHIP programs would also likely increase children’s access to prescription drugs.  Under the rebate program, which includes an open formulary protection for beneficiaries, 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 because the rebate program does not currently apply.  Some states include Medicaid’s Early and Periodic, Screening, Diagnostic and Treatment (EPSDT) benefit as part of their separate CHIP benefit packages.  The EPSDT benefit 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 include it in their separate state CHIP programs.  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.)

Authorizing the Centers for Medicare and Medicaid Services to Negotiate Supplemental Rebates on Behalf of States

As noted, states may negotiate voluntary supplemental rebates from manufacturers, on top of the substantial rebates required under the MDRP.  States use the risk of placement on non-preferred drug lists and utilization management tools such as prior authorization and step therapy to provide bargaining leverage with manufacturers when they negotiate supplemental rebates.

That leverage can be further enhanced by participation in multi-state purchasing pools who negotiate on their behalf.  As of 2019, 31 states and the District of Columbia participated in such pools, although they tend to be smaller states as larger states typically negotiate supplemental rebates on their own.  In addition, states can generate additional leverage by ensuring that supplemental rebates are negotiated on behalf of both fee-for-service and managed care on a uniform basis (including using the same preferred drug list in both) rather than relying on managed care plans to negotiate their own discounts (whether the pharmacy benefit is carved out or included in managed care benefits).

However, according to MACPAC, the supplemental rebates that states negotiate are relatively modest compared to the mandatory federal rebates, accounting for only 6.5 percent of total rebates paid by manufacturers in 2021.  States, however, are negotiating larger supplemental rebates than in the past.  In fiscal year 2021, for example, total supplemental rebates equaled $2.8 billion, more than double the $1.3 billion in rebates negotiated by states in fiscal year 2018.

The budget proposes to allow the Centers for Medicare and Medicaid Services (CMS) to negotiate supplemental rebates on behalf of states for “high-cost drugs”.  According to the budget, CMS would use a private sector contractor to conduct the supplemental rebate negotiations and, assumedly, state participation would be voluntary.  The budget does not provide any detail on how high-cost drugs would be defined.  According to the Office of Management and Budget, this proposal would produce estimated federal Medicaid savings of $5.3 billion over the next 10 years.

Whether this new federal purchasing pool will be successful in negotiating larger supplemental rebates than is the case today will depend on a number of factors.  There would have to be sufficient state participation, including among some of the larger states that now opt out of multi-state purchasing pools in favor of negotiating on their own.  States would also have to be more willing to align their preferred drug lists across fee-for-service and managed care in their own jurisdictions and across other states participating in the federal purchasing pool.  Some states that currently participate in multi-state purchasing pools do not align their preferred drug lists with those of other states.  Finally, manufacturers may be willing to provide larger supplemental rebates than they do now, for administrative ease.  Instead of having to separately negotiate supplemental rebates with the three major multi-state purchasing pools as well as a number of individual states, they would only have to negotiate with the single federal purchasing pool.  But if there is only modest state participation in the federal pool, this advantage would not manifest.

Allowing the Territories to Opt-Out of the Medicaid Drug Rebate Program Without a Waiver

While Puerto Rico and the other territories — American Samoa, Guam, the Northern Mariana Islands and the U.S. Virgin Islands — are technically required to participate in the Medicaid Drug Rebate Program as of January 1, 2023, they can seek federal approval for a waiver to continue to stay out of the MDRP.  If territories continue to opt-out, they (or health plans on their behalf) would have to negotiate any rebates from manufacturers only on a voluntary basis.  So far, it appears that only Puerto Rico has begun participating in the MDRP as scheduled, while the other territories continue to opt-out.

The budget proposes to make it easier for the other territories to opt-out of the MDRP by no longer requiring a waiver.  In addition, drug sales within the territories that continue to not participate in the MDRP would not count for purposes of determining the Average Manufacturer Price and the best price (discussed above), which may have a modest effect on the willingness of manufacturers to offer voluntary rebates to such territories.

According to OMB, this proposal would have no budgetary impact.  This is likely the case because the new authority would not change which of the territories outside of Puerto Rico will continue to opt-out of the MDRP or the magnitude of the voluntary rebates they now negotiate.

However, instead of making it easier for territories to remain outside of the MDRP, the Biden Administration should be encouraging the other territories to newly participate in the rebate program, just as Puerto Rico is finally doing.  This would have the benefit of reducing their Medicaid prescription drug costs, net of rebates and discounts, because as Puerto Rico’s Medicaid program expects, the federally-required rebates would be significantly larger than the rebates that were previously negotiated on a voluntary basis only.  Moreover, as noted above, participation in the MDRP would mean that beneficiaries would have greater access to needed prescription drugs due to the open formulary requirement (discussed above).  For example, because it was not previously subject to the open formulary requirement, Puerto Rico did not cover any drugs curing Hepatitis C until March 2020, even though such drugs first entered the market in 2014.  That would not have been permitted if the open formulary protection was in effect in Puerto Rico.

It is likely that this budget proposal is taking into account a variety of challenges facing the other territories.  For example, the other territories may incur increased pharmacy costs as beneficiaries gain greater access, which may, at least initially, outweigh the sizable rebate savings over time.  The other territories may also lack, for now, the administrative capacity necessary to implement the rebate program.  Nevertheless, as part of this budget proposal, the Administration could also require mandatory implementation timelines under which the other territories would have to eventually participate in the MDRP, with no opt-out permitted.  Notably, the federal matching rate for the territories outside of Puerto Rico is now permanently set at 83 percent and the other territories will also likely have sufficient federal funding to sustain and improve their Medicaid programs, including their pharmacy benefit, over the medium term.