Posted 02 November 2015
By Zachary Brennan
As drug price increases continue to make waves on the national level, Congress is taking the matter into its own hands by requiring generic drugmakers under the Medicaid Drug Rebate Program to pay higher rebates if generic prices rise too quickly.
The new penalty for such price increases on generics, which is included in the recently passed budget deal (and which President Barack Obama signed on Monday), basically amounts to additional rebates that generic drug manufacturers would have to pay if the price of a generic for a given quarter outpaces the inflation-adjusted baseline Average Manufacturer Price (AMP).
So how big of an impact will this change likely have? A report from 2007 from the HHS Office of the Inspector General found that generic drug price increases exceeded the statutory inflation factor applicable to brand-name drugs for 35% of the quarterly AMPs OIG reviewed between 1991 and 2004.
“If the provision for brand-name drugs were extended to generic drugs, the Medicaid program would receive additional rebates… we calculated that the Medicaid program would have received a total of $966 million in additional rebates for the top 200 generic drugs, ranked by Medicaid reimbursement, from 1991 through 2004,” according to the report.
And unlike previous calls by presidential candidates and others to stem the rise of drug prices, which have failed to materialize, this shift under the rebate program “represents the first time that one of these proposals has been enacted, and we fear it is a portent of more to come,” according to the FDA Law Blog.
How the Rebate System Works
The Medicaid Drug Rebate Program, which includes the participation of 600 drug manufacturers nationwide, helps to offset federal and state costs of most outpatient prescription drugs dispensed to Medicaid patients.
The program requires a drug manufacturer to enter into a rebate agreement with the Department of Health and Human Services (HHS) in exchange for state Medicaid coverage of most of the manufacturer’s drugs. When a manufacturer markets a new drug, it must also submit product and pricing data concerning the drug to the Centers for Medicare & Medicaid Services (CMS).
Rebates are paid by the manufacturers on a quarterly basis to states and are shared between the states and the federal government to offset the cost of prescription drugs under the Medicaid program.
The amount of rebate due for each drug is based on different formulas for innovator drugs, blood clotting factors, drugs approved by the US Food and Drug Administration (FDA) exclusively for pediatric indications, new formulations of brand name drugs and non-innovator, or generic drugs.
Currently, for new brand name drugs (which generally includes those approved under new drug applications), the base rebate is calculated as either 23.1% of the AMP, or the difference between the AMP and the best price per unit of the drug. For drugs approved non-innovator or generic drugs, the base rebate is 13% of the AMP.
However, innovator drug manufacturers are required to provide an additional rebate if the AMP for a given quarter exceeds the inflation-adjusted baseline AMP.
Under the Bipartisan Budget Act of 2015, the additional rebate that’s historically only been applied to innovator products would now be applied to generics, too, beginning in Q1 of 2017.
“The amount of the rebate specified in this paragraph for a rebate period, with respect to each dosage form and strength of a covered outpatient drug other than a single source drug or an innovator multiple source drug of a manufacturer, shall be increased in the manner that the rebate for a dosage form and strength of a single source drug or an innovator multiple source drug is increased,” the act says.
The additional rebate due for generics is equal to the AMP for the current quarter minus the baseline AMP adjusted for inflation, according to FDA Law Blog.
And according to the law firm Reed Smith, the change could create issues for generic manufacturers around updating their Medicaid price reporting systems, figuring out the potential financial impact of the change, and posing new strategic pricing questions for generic drug launches and market withdrawals.
The move to apply the increased rebates to generic drugs was previously introduced as part of a separate bill by Sen. Bernie Sanders (D-VT) and Rep. Elijah Cummings (D-MD). And like the OIG report, the Congressional Budget Office noted such a policy change could save about $1 billion over 10 years.
Bipartisan Budget Act of 2015
FDA Law Blog
HHS OIG on Medicare and Medicaid Prescription Drug Rebates