How do medicaid drug rebates work

This paper describes the…. Related articles Building a bigger table for a more equitable drug development system. The Medicaid Drug Rebate Program requires manufacturers to pay rebates to state Medicaid programs so that they do not overpay for drugs. The program is complicated. It is also vulnerable to several types of fraud. Below we explain how it works, and how drug companies can and do defraud it.

We also give examples where the False Claims Act has been used to address fraudulent behavior that harms the program. Medicaid covers prescription outpatients drugs costs for qualifying individuals with financial need. However, Medicaid is forbidden from negotiating drug prices with drug manufacturers the way private insurers can. This creates a risk that pharmaceutical drug manufacturers will force Medicaid to pay above-market prices for drugs.

Currently, around drug manufacturers participate in this program. The goal of the MDRP is to return to the states the difference between the best price that a manufacturer sells a drug for and the market average. In short, to make sure that Medicaid gets the best deal of any wholesale buyer. It does so by requiring manufacturers first to calculate the average price and best price for which they sold each drug.

Then, they must refund the difference to Medicaid each quarter. To really understand how the Medicaid Drug Rebate Program formulas work, one first needs to understand some key terms. The AMP is the average price buyers pay for the drug over the past quarter.

This price should include discounts given to purchasers such as retail pharmacies but does not include service fees. Manufacturers must calculate this price every quarter from their sales and report it to the government. The Best Price is the lowest price that a purchaser has paid the manufacturer for the drug including cash discounts, rebates or any other inducement given to private customers. Under the MDRP, state Medicaid programs receive a different basic rebate for branded drugs, generics and certain pediatric and blood clotting drugs.

Basic rebates for brand name drugs are calculated as the larger of the difference between AMP and the Best Price or The additional rebate is meant to offset any drug price increase beyond inflation.

If this increase is larger than the increase in the Consumer Price Index for Urban areas over the same period, the manufacturer must rebate the difference to the states. This has actually become a major driver of Medicaid Drug Rebates. A HHS-OIG report found that most brand drug rebates in were attributable to the inflationary component rebates.

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Other state efforts include expanding the scope of supplemental rebates—for example, by extending supplemental rebates to MCOs—or adding an inflationary component to supplemental rebates. A final way in which states have been pursuing supplemental rebates is through value-based purchasing.

With the increasing number of high-price, breakthrough drugs that cost hundreds of thousands up to millions of dollars, states are examining ways to pay for these therapies within their constrained budgets. Some states are pursuing alternative payment methods, or paying for value, as possible solutions.

States have authority to pursue these agreements, but they must fit within the parameters of the MDRP. Given the best price provision, which leads manufacturers to hesitate to offer lower prices, states have opted to craft their arrangements under the umbrella of supplemental rebates, which are exempt from best price. As of October , six states have approval to implement alternative payment models via supplemental rebates. Some legislative proposals would provide further authority for states to enter into risk-sharing, value-based contracts with manufacturers for outpatient drugs that are potentially curative treatments.

Some policy discussion in recent years has been about opting out of or eliminating the MDRP, which essentially creates an open formulary, to allow states to use closed formularies in Medicaid, under which only specific drugs in each therapeutic class are covered. The Trump Administration has expressed interest in this approach, and the FY budget called for a new Medicaid demonstration authority to enable up to five state Medicaid programs to create their own formularies and negotiate directly with manufacturers instead of participating in the Medicaid Drug Rebate Program.

While not specifically targeted to Medicaid or MDRP, policy proposals to change the structure of rebates or prices in Medicare and the private market also affect Medicaid. These indirect effects occur because many proposals affect list prices or AMP, which in turn affect Medicaid rebate calculations.

The Administration withdrew the idea, but analyses of the proposal at the time indicated that it would increase Medicaid spending. This outcome would occur through decreased list prices by manufacturers, which would lower the inflationary Medicaid rebate.

Policy changes that would allow the federal government to negotiate Medicare prices also may have implications for Medicaid, depending on how the price applies to the wider marketplace and the prices used to set Medicaid rebates.

The MDRP helps offset federal and state costs of most outpatient prescription drugs dispensed to Medicaid beneficiaries and ensures access to medication for Medicaid beneficiaries. While gross prescription drug costs continue to grow, the Medicaid Drug Rebate Program has held net Medicaid costs largely flat over the past few years. There continues to be growing national attention around the issue of high drug prices and as a result, both states and the federal government are considering a variety of policies to address prescription drug costs.

Because of the key role Medicaid plays in providing drugs for beneficiaries and setting the floor for prices, it is important for policy makers to understand the implications of any proposed policies for the rebate program. This work was supported in part by Arnold Ventures. We value our funders. KFF maintains full editorial control over all of its policy analysis, polling, and journalism activities. This brief explains the MDRP to help policymakers and others understand how Medicaid pays for drugs and any potential consequences of policy changes for the program by answering the following questions: What is the MDRP and how does it work?

What is the impact of the MDRP? What is the role of managed care plans and pharmacy benefit managers in Medicaid rebates? What are policy proposals related to the MDRP? What is the Medicaid drug rebate program and how does it work?