This year, there has been renewed focus in Congress on how to address the ongoing problem of drug shortages, especially with cancer patients now facing severe shortages of widely used generic chemotherapy drugs.  On July 28, 2023, House Energy and Commerce Committee Chair Cathy McMorris Rodgers unveiled a draft bill intended to address the “root causes” of drug shortages.

The draft bill includes a provision that would exempt manufacturers of certain generic drugs from having to pay any inflation-related rebates under the highly effective Medicaid Drug Rebate Program (MDRP), which, for example, ensures Medicaid obtains the lowest net prices for brand-name drugs compared to other federal programs and agencies.  This Medicaid exemption provision, however, raises concerns.  The provision is not well targeted, extending to many generic injectable drugs not in shortage.  By reducing the rebates paid by generic manufacturers for many generic drugs, the provision could substantially increase federal and state Medicaid prescription drug costs.  At the same time, it is unclear whether this exemption provision would have any significant impact in reducing critical drug shortages.  The provision also would create troubling incentives for manufacturers to game the Food and Drug Administration (FDA) shortage reporting process.  Instead, any exemption from the Medicaid inflation-related rebate to address critical drug shortages should be designed more narrowly: it should be highly targeted, temporary, and limited in size.  It should also be explicitly tied to manufacturer improvements and production increases to ensure that it would actually reduce drug shortages.

Under the MDRP, in order for their generic drugs to be covered under Medicaid, manufacturers must pay rebates to state Medicaid programs, with the federal government and the states sharing in the savings.  These generic drug rebates consist of two elements: (1) a basic rebate equal to 13 percent of the Average Manufacturer Price and (2) an inflation-related rebate equal to the amount by which annual increases in Average Manufacturer Price outpace general inflation.  The inflation-related rebate, which has applied to brand-name drugs since the MDRP’s inception, was extended to generic drugs as of 2017.

Section 101 of the draft bill would entirely exempt manufacturers from having to pay the Medicaid inflation-related rebate for certain generic drugs starting on January 1, 2024.  The first group of exempted drugs would include generic drugs that are either on the FDA’s drug shortage list or that are suffering from a severe supply chain disruption due to a natural disaster or other unique or unexpected event, as determined by the Secretary of Health and Human Services.  The second group of exempted drugs would include any sterile, injectable drug with at least one indication for a serious disease or condition and with at least two manufacturers.  In addition, the draft bill would reinstate a cap on total rebates paid by manufacturers for both groups of generic drugs.  Prior to January 1, 2024, total rebates for both brand-name and generic drugs may not exceed 100 percent of Average Manufacturer Price.  As we have previously explained, that cap was eliminated under the American Rescue Plan Act in order to discourage manufacturers from imposing excessive annual price increases over time.  Lifting the Medicaid rebate cap was likely a key factor in recent price reductions by insulin manufacturers.

The Medicaid provision of the draft drug shortages bill raises numerous concerns:

1. The provision is not well targeted. For the second group of generic drugs exempted, the bill defines an indication for a serious disease or condition by referencing 21 C.F.R. § 312.300. However, paragraph (b) of such regulation very broadly defines a serious disease or condition as “a disease or condition associated with morbidity that has substantial impact on day-to-day functioning.  Short-lived and self-limiting morbidity will usually not be sufficient, but the morbidity need not be irreversible, provided it is persistent or recurrent.  Whether a disease or condition is serious is a matter of clinical judgment, based on its impact on such factors as survival, day-to-day functioning, or the likelihood that the disease, if left untreated, will progress from a less severe condition to a more serious one.”  This would seem to encompass many — possibly most — sterile, injectable generic drugs, even if they are not actually in shortage or suffering from a severe supply chain disruption.The exemption for the group shortage drugs appears overly expansive as well.  For comparison, some aspects of the exemption go beyond similar provisions included in the Inflation Reduction Act (IRA) related to the new Medicare inflation-related rebates.  For example, under the IRA, the Secretary “shall reduce or waive” inflation-related rebates for Part D drugs if they are currently in shortage on the FDA shortage list, the Secretary has determined there is a severe supply chain disruption in the case of generic or biosimilar drugs, or the Secretary has determined that without such reduction or waiver the drug is likely to be in shortage on the FDA shortage list.  The discussion draft, in contrast, would require a 100 percent exemption from Medicaid inflation-related rebates, rather than giving the Secretary the option of allowing only a rebate reduction.  Also, in its February 2023 implementation memo for the Medicare inflation-related rebates, the Centers for Medicare and Medicaid Services (CMS) indicated that it was considering either a variable reduction in rebate amounts based on the length of time a drug was on the shortage list or a limited standard deduction, which could be adjusted based on manufacturer request, rather than full waivers for any drug in shortage.  Moreover, CMS also indicated its intent to limit the definition of severe supply chain disruptions to those due to factors outside of a manufacturer’s control, rather than to issues like failure to comply with good manufacturing practice requirements.
2. The provision would increase federal and state Medicaid prescription drug costs. Researchers from Brigham and Women’s Hospital and Harvard University recently estimated that the inflation-related rebates reduced federal and state Medicaid generic prescription drug costs by between 2 and 12 percent — $516 million to $6.5 billion — over the period 2017-2020. (The researchers estimated a range of savings due to data limitation issues.)  Similarly, when the Medicaid inflation-related rebates for generic drugs were enacted in 2015, the Congressional Budget Office estimated that the provision would reduce federal Medicaid spending by $1 billion over ten years and by $156 million in the tenth year.  Moreover, while it is unclear how many generic drugs, if any, would have rebate obligations in excess of 100 percent of Average Manufacturer Price when the rebate cap is eliminated starting in 2014, lifting the cap was likely a key factor in price decreases instituted by brand-name insulin manufacturers earlier this year.   As a result, any exemption, especially a broad one exempting many injectable drugs, would reduce generic inflation-related rebates and thereby increase net federal and state Medicaid prescription drug costs, possibly substantially.  Notably, the same Brigham and Women’s Hospital and Harvard University researchers previously found that one in five generic drugs experienced a price spike from at least one manufacturer between 2014-2017, with nearly half of generic injectable drugs experiencing a price spike over the period.  (A price spike was defined as price increases of 100 percent or more over the previous year or 50 percent or more over the previous quarter.)  They also conclude that because of the generic inflation-related rebates, state Medicaid programs are now protected from these price spikes; “generic drug spikes now have little or no impact on state Medicaid spending….”  The draft bill, however, could considerably undercut that fiscal protection.
3. The provision may do little to address shortages of critical generic drugs. Since the Medicaid inflation-related rebates have been extended to generic drugs, the generic drug industry has repeatedly blamed the rebates as a key contributor to drug shortages (for example, here and here). Of course, shortages have been a persistent, serious problem well before the rebates first took effect in 2017.  Moreover, like the Government Accountability Office and the Assistant Secretary for Planning and Evaluation (ASPE), in its 2019 report entitled “Drug Shortages: Root Causes and Potential Solutions,” the FDA cites quality problems among manufacturers, intense price competition, the lack of purchaser incentives for good manufacturing practices and the complexity of the supply chain as the major contributors to ongoing drug shortages.  While FDA acknowledged the manufacturer argument that the Medicaid inflation-related rebates “could erode the incentive for the manufacturer to continue marketing the drug and increase the likelihood of drug shortages,” FDA noted that the “argument that the CPI-U rebate will make it difficult for manufacturers to recoup rising input costs may be weak, however.  There is little evidence that manufacturing input costs are rising faster than the CPI-U, and they are likely to be captured in the rising costs of consumer goods that the CPI-U measures.”  Finally, it is notable that moving forward, high general inflation during the pandemic will be permanently built into the calculation of inflation-related rebates moving forward.  This will effectively give manufacturers more “room” to raise prices without being subject to Medicaid inflation-related penalties, which could ostensibly pay for greater investments in good manufacturing practices and more stable supply chains over time as generic manufacturers claim.
4. The provision risks manufacturer gaming. In discussing the Medicare inflation-related rebates under the IRA, CMS noted that it did not want to “create incentives for misuse of” the FDA shortage reporting process or “for manufacturers to intentionally maintain their Part D rebate drug or biological in shortage for the purpose of avoiding an obligation to pay a rebate.” CMS’ concerns about manufacturer gaming in Medicare would similarly apply to an exemption from Medicaid inflation-related rebates.  As ASPE points out, “because shortages often occur for reasons, such as quality manufacturing practices, under the manufacturer’s control and because manufacturers have better information on market conditions and their production capacity that certain manufacturers could be incentivized to intentionally create a shortage or maintain a drug in shortage to avoid their obligation to pay a rebate.”  In other words, some manufacturers could reduce production just enough to remain in (or go into) shortage to avoid Medicaid rebate obligations if an exemption was from inflation-related rebates was available.

Any policy to provide an exemption from the Medicaid inflation-related rebate to address critical generic drug shortages should instead be designed far more narrowly.  For example, it should be highly targeted to a limited number of generic drugs in shortage that are deemed critical high-need drugs.  It should be temporary, available for only a very short duration.  An exemption should also be limited in size, with a percentage reduction in rebate amounts, not a full waiver, that varies based on severity and duration of a shortage.  It should also not include a reimposition of the rebate cap.  Finally, any exemption should be explicitly tied to specific manufacturer actions that would reduce the risk of shortages such as improvements in compliance with good manufacturing practices and in supply chain management and benchmark increases in production capacity with clear timelines.