New Inspector General Report Finds Manufacturers Would Have to Pay Substantial Rebates if the Medicaid Drug Rebate Program Applied to Separate State CHIP Programs

The Office of Inspector General (OIG) at the Department of Health and Human Services issued a new report estimating that applying the Medicaid Drug Rebate Program (MDRP) to separate state CHIP programs would have resulted in drug manufacturers paying $641.2 million in rebates in calendar year 2020 alone, with the federal government receiving $515.7 million in rebates and states receiving $125.5 million in rebates.  That would have reduced total separate state Children’s Health Insurance Program (CHIP) drug spending — which was about $1.2 billion in calendar year 2020 — by nearly 55 percent.

Under CHIP, states can use federal funding to expand children’s coverage through Medicaid, through a separate state CHIP program, or through a combination of both.  As I have previously written, while the MDRP applies to CHIP-funded Medicaid expansions, it does not apply to separate state CHIP programs, resulting in higher federal and state CHIP prescription drug costs.

Currently, separate state CHIP programs (or CHIP managed care plans on their behalf) are likely only able to negotiate far smaller rebates (if any) 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 the Medicaid and CHIP Payment and Access Commission (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 percent 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 in its fiscal year 2024 budget and was included in the original House-passed Build Back Better reconciliation bill in November 2021, drug manufacturers would be required to pay the same rebates they pay under Medicaid.  In its new report, after conducting a survey of separate state CHIP programs, OIG estimates the amount of drug rebates that manufacturers would have had to pay to the federal government and states if all 40 separate state CHIP programs were subject to the MDRP in calendar year 2020.  As noted, OIG finds that manufacturers would have had to pay $641.2 million in total rebates in that year alone.  (OIG does not estimate the amount of rebates, if any, that states currently negotiate, noting that in many cases CHIP managed care plans, not states, negotiate rebates from manufacturers.  Moreover, managed care plans may retain those rebates and not pass most or all of the savings to separate state CHIP programs.)

These rebates 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, as under the Biden Administration’s fiscal year 2024 budget, would produce federal savings of $2.3 billion over the next ten years.

In addition, as I have written, 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 individuals, to the extent they are covered by some separate state CHIP programs and such programs impose restrictive drug formularies.)

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