Congress has been examining ways to address the ongoing problem of generic drug shortages, especially with cancer patients continuing to face severe shortages of widely used generic chemotherapy drugs.  Both the House Energy and Commerce Committee and the Senate Finance Committee have held hearings on generic drug shortages, with the Senate Finance Committee also issuing a white paper with policy options.

Some of the legislative proposals intended to address generic drug shortages relate to Medicaid.  For example, as I have previously written, a draft bill from House Energy and Commerce Committee Chair Cathy McMorris Rodgers, unveiled last year, includes a troubling provision that would permanently exempt manufacturers of certain generic drugs from having to pay any inflation-related rebates under the highly effective Medicaid Drug Rebate Program (MDRP).  But the provision is not well targeted, extending to many generic sterile injectable drugs not in shortage.  Moreover, by reducing the rebates paid by generic manufacturers for many generic drugs, the provision could substantially increase federal and state Medicaid prescription drug costs.  The provision would also create troubling incentives for manufacturers to game the Food and Drug Administration (FDA) shortage reporting process.  Finally, it is unlikely that this exemption provision would have any significant impact in reducing critical drug shortages.

Now, Senate Finance Committee Chair Ron Wyden and Ranking Member Mike Crapo have issued their own draft generic drug shortages bill.  Unfortunately, like the draft House bill, this bill raises serious concerns.  In fact, the draft Senate bill goes much farther than the House bill by permanently and fully exempting most generic drugs from the Medicaid inflation-related rebates — not just sterile injectable drugs for serious diseases or conditions with at least two manufacturers as under the House bill — irrespective of whether the drugs are in shortage or at risk of being in shortage.  Only single source drugs that have an annual cost over $100 would, in general, remain subject to the inflation-related rebates.  It would leave state Medicaid programs at risk of facing higher prescription drug costs resulting from price spikes for most generic drugs.  And like the House bill, it is unlikely that the provision would have a significant effect on ameliorating generic 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 the 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 starting on January 1, 2017 under a bipartisan budget bill enacted by Congress in 2015.

Section 3 of the draft Senate bill would broadly, permanently and fully exempt manufacturers from having to pay the Medicaid inflation-related rebate for generic drugs starting on January 1, 2027, unless a generic drug is both single source and has an annual cost of $100, adjusted annually for general inflation.  In addition, for any generic drugs that remain subject to the inflation-related rebate, the Secretary of Health and Human Services would further be required to reduce or waive such rebate in the case of drugs in shortage, drugs suffering from a severe supply chain disruption due to a natural disaster or other unique or unexpected event, or drugs that the Secretary determines are likely to be in shortage without a reduction or waiver of the inflation-related rebates.

This Medicaid provision of the draft Senate drug shortages bill raises serious concerns:

1. The provision is not targeted and constitutes a broad rollback of the Medicaid inflation-related rebate for most generic drugs. Any generic drug that is not single source — for example, the brand-name drug including any authorized generic is not being marketed and there is no other therapeutically equivalent drug — would be fully exempt from the inflation-related rebate on a permanent basis, even if they are not in shortage or at any risk of being in shortage. Yet according to researchers from Brigham and Women’s Hospital and Harvard University, nearly 70 percent of generic drugs in 2017 had at least two manufacturers and nearly half had three or more manufacturers.  Additional single source generic drugs would also be made exempt if their annual cost does not exceed $100 (annually adjusted for inflation), if they are first entrants during a 180-day exclusivity period or if they are a first bio-generic.
2. The provision would leave state Medicaid programs at risk of price spikes for generic drugs. Exempting most generic drugs from the Medicaid inflation-related rebate would reduce total rebates paid by manufacturers and raise net Medicaid prescription drug costs. The draft Senate bill proposes to increase the basic rebate for generic rebates from the current 13 percent of AMP to a higher but unspecified percentage point amount, which is intended to “keep the Medicaid program whole for any lost rebates…”  Presumably, the percentage point increase in the basic rebate would be set to equal the amount estimated by the Congressional Budget Office (CBO) to produce savings that roughly offset the increased spending resulting from a very broad exemption from the inflation-related rebate.  That, however, would still leave state Medicaid programs at risk for significant price increases instituted by manufacturers for individual generic drugs, especially if those price increases are more widespread, frequent or larger than what CBO assumes.  Notably, 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.)  Researchers from Brigham and Women’s Hospital and Harvard University 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 Senate bill, however, would considerably undercut that fiscal protection for Medicaid programs (and the disincentives for manufacturers to sharply raise prices over time, irrespective of whether such generic drugs are in shortage or at risk of being in shortage).
3. The provision would likely do little to address shortages of critical generic drugs. As I have previously noted, 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 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 Food and Drug Administration (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 the 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,” the agency also noted that the “argument that the CPI-U rebate will make it difficult for manufacturers to recoup rising input costs may be weak….  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, the draft Senate bill does not tie this broad and permanent exemption from the Medicaid inflation-related rebates for most generic drugs to any manufacturer actions or commitments that could actually 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.

A better alternative than the draft Senate bill’s current Medicaid provision would be to provide limited new authority for the Secretary of Health and Human Services to temporarily reduce the Medicaid inflation-related rebate in the case of certain critical high-need generic drugs that are in shortage, suffering from a severe supply chain disruption or determined to likely be in shortage without a reduction of the inflation-related rebate.  But like how the new Medicare inflation-related rebate is being implemented, reductions in Medicaid rebate amounts should vary based on factors such as the length of time a drug is on the FDA’s shortage list and the severity of the shortage.  Also, any reduction should be limited to only a portion of the inflation-related rebate, not a full exemption, and any reductions should be available only for a very short duration.  That would help reduce the risk of gaming by manufacturers to enter or remain in shortage and limit the negative impact on net Medicaid prescription costs.  In addition, severe supply chain disruptions that qualify for a reduction should be limited to those due to factors outside a manufacturer’s control rather than issues like failure to comply with good manufacturing practices.