Understanding the Medicaid Prescription Drug Rebate Program

Issue Brief
  1.   United States Senate Special Committee on Aging, Prescription Drug Pricing: Are We Getting Our Money’s Worth? (U.S. Government Printing Office, 1989), https://www.aging.senate.gov/imo/media/doc/reports/rpt289.pdf.

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  2. Ramsey Baghdadi, “Medicaid Best Price,” Health Affairs (August 2017), https://www.healthaffairs.org/do/10.1377/hpb20171008.000173/full/.

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  3. For individuals with incomes above 150% of the FPL, rules allow states to establish higher cost sharing, including coinsurance of up to 20% of the cost of the drug, for non-preferred drugs. See 78 Federal Register 42159-42322 (July 15, 2013), and Laura Snyder and Robin Rudowitz, Premiums and Cost-sharing in Medicaid (Kaiser Family Foundation, February 2013), https://www.kff.org/medicaid/issue-brief/premiums-and-cost-sharing-in-medicaid-a-review-of-research-findings/.

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  4. State Health Facts, “Medicaid Benefits: Prescription Drugs, 2018,” KFF, https://www.kff.org/medicaid/state-indicator/prescription-drugs.

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  5. 42 U.S.C. § 1396b (m)(2)(A)(xiii)

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  6. Kaiser Family Foundation, Medicaid’s Prescription Drug Benefit: Key Facts (KFF, May 2019), https://www.kff.org/medicaid/fact-sheet/medicaids-prescription-drug-benefit-key-facts/.

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  7. Medicaid statute defines Best Price as “the lowest price available from the manufacturer during the rebate period to any wholesaler, retailer, provider, health maintenance organization, nonprofit entity, or government entity within the United States.” There are many important exclusions, including the Department of Veterans Affairs, the 340B program, the Department of Defense, the Public Health Service, the Indian Health Service. The Best Price includes rebates in general, but not Medicaid supplemental rebates or rebates provided through the Medicaid Drug Rebate Program. 42 U.S.C. 1396r-8 (c)(1)(C).

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  8. Single source drugs and multiple source innovator drugs are those approved under a “new drug” application with the FDA.

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  9. 42 U.S.C. § 1396r-8 (c) (1)(C)

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  10. 42 U.S.C. § 1396r-8 (k) (1)(A)

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  11. This price does include discounts provided to retail pharmacies but does not include service fees or rebates or discounts to other purchasers (like MCOs and PBMs), see 42 U.S.C. § 1396r-8 (k) (1)(B).

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  12. Medicaid and CHIP Payment and Access Commission, Medicaid Payment for Outpatient Prescription Drugs (Medicaid and CHIP Payment and Access Commission, May 2018), https://www.macpac.gov/wp-content/uploads/2015/09/Medicaid-Payment-for-Outpatient-Prescription-Drugs.pdf.

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  13. Office of the Inspector General, U.S. Department of Health and Human Services, Medicaid Rebates for Brand-name Drugs Exceeded Part D Rebates by a Substantial Margin, OEI-03-13-00650 (HHS OIG, April 2015), https://oig.hhs.gov/oei/reports/oei-03-13-00650.pdf.

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  14. Due to rising costs over time, some rebates could exceed 100% of AMP.

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  15. Centers for Medicare and Medicaid Services, “Medicaid Pharmacy Supplemental Rebate Agreements (SRA), As of June 2019,” https://www.medicaid.gov/medicaid-chip-program-information/by-topics/prescription-drugs/downloads/xxxsupplemental-rebates-chart-current-qtr.pdf.

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  16. Richard Cauchi, Pharmaceutical Bulk Purchasing (National Council of State Legislatures, May 2019), http://www.ncsl.org/research/health/bulk-purchasing-of-prescription-drugs.aspx.

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  17. 42 U.S.C. § 1396r-8  (b) (3)

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  18. States retain a portion of the rebate based on their FMAP, and the remainder that is owed to the federal government is subtracted from federal payments to states.

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  19. This includes the state share. See Cindy Mann,  “Re: Medicaid Prescription Drugs, Methodology for Calculating the Estimated Quarterly Rebate Offset Amount,” CMS, https://www.medicaid.gov/Federal-Policy-Guidance/downloads/SMD10019.pdf.

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  20. State Health Facts, “Total Medicaid MCO Enrollment, 2017”, KFF, https://www.kff.org/other/state-indicator/total-medicaid-mco-enrollment/.

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  21. Kathleen Gifford, Eileen Ellis, Barbara Coulter Edwards, Aimee Lashbrook, Elizabeth Hinton, Larisa Antonisse, and Robin Rudowitz, States Focus on Quality and Outcomes Amid Waiver Changes: Results from a 50-State Medicaid Budget Survey for State Fiscal Years 2018 and 2019 (KFF, October 2018), https://www.kff.org/medicaid/report/states-focus-on-quality-and-outcomes-amid-waiver-changes-results-from-a-50-state-medicaid-budget-survey-for-state-fiscal-years-2018-and-2019/.

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  22. States that use PBMs in administering the prescription drug benefit in a fee-for-service setting pay the PBM administrative fees for these services. See Magellan Health, Medicaid Pharmacy Trend Report, Second Edition (Magellan Rx Management, 2017), https://www1.magellanrx.com/media/671872/2017-mrx-medicaid-pharmacy-trend-report.pdf.

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  23. Sarah Lanford and Maureen Hensley-Quinn, New PBM Laws Reflect States’ Targeted Approaches to Curb Prescription Drug Costs (National Academy for State Health Policy, August 2019), https://nashp.org/new-pbm-laws-reflect-states-targeted-approaches-to-curb-prescription-drug-costs/.

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  24. Lanford and Hensley-Quinn, New PBM Laws Reflect States’ Targeted Approaches to Curb Prescription Drug Costs (NASHP, August 2019), https://nashp.org/new-pbm-laws-reflect-states-targeted-approaches-to-curb-prescription-drug-costs/.

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  25. Eligible covered entities include the following: federally qualified health centers, federally qualified health center look-alikes, native Hawaiian health centers, tribal/urban Indian health centers, Ryan White HIV/AIDS Program grantees, children’s hospitals, critical access hospitals, disproportionate share hospitals, freestanding cancer hospitals, rural referral centers, sole community hospitals, black lung clinics, comprehensive hemophilia diagnostic treatment centers, Title X family planning clinics, sexually transmitted disease clinics, and tuberculosis clinics. See MACPAC, The 340B Drug Pricing Program and Medicaid Drug Rebate Program: How They Interact (MACPAC, May 2018), https://www.macpac.gov/wp-content/uploads/2018/05/340B-Drug-Pricing-Program-and-Medicaid-Drug-Rebate-Program-How-They-Interact.pdf.

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  26. Mike McCaughan, “The 340B Drug Discount Program, Health Affairs (September 2017), https://www.healthaffairs.org/do/10.1377/hpb20171024.663441/full/.

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  27. 42 U.S.C. § 1396r-8  (a) (5)

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  28. Providers can choose whether they “carve in” — use drugs purchased under the 340B program for Medicaid beneficiaries — or “carve out” — the provider does not use drugs purchased under 340B and the drugs are eligible for the Medicaid Rebate Program. HRSA uses a Medicaid Exclusion File to track drugs purchased under 340B but, this method only applies to FFS Medicaid. States must have their own methods for managed care beneficiaries. See Office of Pharmacy Affairs, Clarification on Use of the Medicaid Exclusion File (HHS Health Resources and Services Administration, December 2014), https://www.hrsa.gov/sites/default/files/opa/programrequirements/policyreleases/clarification-medicaid-exclusion.pdf.

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  29. MACPAC, The 340B Drug Pricing Program and Medicaid Drug Rebate Program: How They Interact (MACPAC, May 2018), https://www.macpac.gov/wp-content/uploads/2018/05/340B-Drug-Pricing-Program-and-Medicaid-Drug-Rebate-Program-How-They-Interact.pdf.

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  30. The Medicaid Exclusion File (MEF) is maintained by the Health Resources and Services Administration (HRSA). See MACPAC, The 340B Drug Pricing Program and Medicaid Drug Rebate Program: How They Interact (MACPAC, May 2018), https://www.macpac.gov/wp-content/uploads/2018/05/340B-Drug-Pricing-Program-and-Medicaid-Drug-Rebate-Program-How-They-Interact.pdf.

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  31. 42 Federal Register 27497-27901, (May 6, 2016).

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  32. HRSA guidance states that contract pharmacies are prohibited from dispensing 340B drugs to Medicaid beneficiaries unless the covered entity, contract pharmacy, and Medicaid agency establish “an arrangement to prevent duplicate discounts” and notify HRSA of the arrangement. See Office of Pharmacy Affairs, Clarification on Use of the Medicaid Exclusion File (HHS Health Resources and Services Administration, December 2014), https://www.hrsa.gov/sites/default/files/opa/programrequirements/policyreleases/clarification-medicaid-exclusion.pdf.

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  33. The Covered Outpatient Drug final rule requires states to reimburse 340B covered entities at actual acquisition cost (AAC) plus a professional dispensing fee (PDF) up to the 340B ceiling price. AAC for 340B drugs may be lower than Medicaid prices but these “below-ceiling” prices may be difficult for states to obtain. The AAC requirement only applies to FFS Medicaid drugs, drugs covered by MCOs in Medicaid are not subject to this requirement. See 81 Federal Register 5169-5357, (February 1, 2016) and CMS, Covered Outpatient Drug Final Rule with Comment (CMS-2345-FC) Frequently Asked Questions (CMS, July 2016), https://www.medicaid.gov/federal-policy-guidance/downloads/faq070616.pdf.

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  34. For covered entities that carve in to 340B, the AAC would generally be the 340B ceiling price. There is some potential for spread pricing in Medicaid if a covered entity purchases drugs at sub-ceiling prices. See MACPAC, The 340B Drug Pricing Program and Medicaid Drug Rebate Program: How They Interact (MACPAC, May 2018), https://www.macpac.gov/wp-content/uploads/2018/05/340B-Drug-Pricing-Program-and-Medicaid-Drug-Rebate-Program-How-They-Interact.pdf.

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  35. Totals include state and federal spending. See MACPAC, Medicaid Drug Spending Trends (MACPAC, February 2019), https://www.macpac.gov/wp-content/uploads/2019/02/Medicaid-Drug-Spending-Trends.pdf.

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  36. Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds, 2018 Annual Report of the Board of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds (CMS, June 2018), https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/ReportsTrustFunds/Downloads/TR2018.pdf.

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  37. Congressional Budget Office, How the Medicaid Rebate on Prescription Drugs Affects Pricing in the Pharmaceutical Industry (CBO, January 1996), https://www.cbo.gov/sites/default/files/104th-congress-1995-1996/reports/1996doc20.pdf  

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  38. Douglas W. Elmendorf, Letter to Hon. Paul Ryan, Ranking Member on the Committee on the Budget (Congressional Budget Office, November 2010), https://www.cbo.gov/sites/default/files/111th-congress-2009-2010/reports/11-04-drug_pricing.pdf.

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  39. MACPAC, Next Steps in Improving Medicaid Prescription Drug Policy (MACPAC, June 2019), https://www.macpac.gov/wp-content/uploads/2019/06/Next-Steps-in-Improving-Medicaid-Prescription-Drug-Policy.pdf.

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  40. MACPAC, Next Steps in Improving Medicaid Prescription Drug Policy (MACPAC, June 2019), https://www.macpac.gov/wp-content/uploads/2019/06/Next-Steps-in-Improving-Medicaid-Prescription-Drug-Policy.pdf.

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  41. Fair AMP Act, H.R.3276, 116th Congress (2019).

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  42. Continuing Appropriations Act, 2020, and Health Extenders Act of 2019, H.R.4378, 116th Congress (2019).

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  43. CBO, Proposals Affecting Health Programs in Budget Function 550 – CBO’s Estimate of the President’s Fiscal Year 2020 Budget (CBO, May 2019), https://www.cbo.gov/system/files/2019-05/55208-healthprograms.pdf.

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  44. Jay Hancock and Sydney Lupkin, “Drugmakers Master Rolling Out Their Own Generics To Stifle Competition,” Kaiser Health News (August 5, 2019), https://khn.org/news/drugmakers-now-masters-at-rolling-out-their-own-generics-to-stifle-competition/.

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  45. MACPAC, Improving Operations of the Medicaid Drug Rebate Program (MACPAC, June 2018), https://www.macpac.gov/wp-content/uploads/2018/06/Improving-Operations-of-the-Medicaid-Drug-Rebate-Program.pdf.

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  46. MACPAC recommendations include providing the Secretary with the authority to reclassify drugs that are incorrectly classified as well as to levy intermediate monetary penalties. The Senate Finance Committee Bill would increase oversight of rebates by requiring CMS to conduct regular audits of drug manufacturers’ pricing information and submit those audits to Congress. The Secretary of HHS would have the authority to impose a penalty on manufacturers that submit inaccurate information and would increase penalties for not complying with reporting requirements. See: https://www.finance.senate.gov/imo/media/doc/FINAL%20Description%20of%20the%20Chairman's%20Mark%20for%20the%20Prescription%20Drug%20Pricing%20Reduction%20Act%20of%202019.pdf.

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  47. KFF analysis of CMS-64 data.

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  48. Office of Inspector General, HHS, States’ Collection of Offset and Supplemental Medicaid Rebates (HHS OIG, December 2014), https://oig.hhs.gov/oei/reports/oei-03-12-00520.pdf.

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  49. Gifford, Ellis, Edwards, Lashbrook, Hinton, Antonisse, and Rudowitz, States Focus on Quality and Outcomes Amid Waiver Changes: Results from a 50-State Medicaid Budget Survey for State Fiscal Years 2018 and 2019 (KFF, October 2018), https://www.kff.org/report-section/states-focus-on-quality-and-outcomes-amid-waiver-changes-pharmacy-and-opioid-strategies/.

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  50. Gabriel Petek, The 2019-20 Budget: Analysis of the Carve Out of Medi-Cal Pharmacy Services From Managed Care (California State Legislative Analyst’s Office, April 2019), https://lao.ca.gov/Publications/Report/3997.

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  51. Lanford and Hensley-Quinn, New PBM Laws Reflect States’ Targeted Approaches to Curb Prescription Drug Costs (NASHP, August 2019), https://nashp.org/new-pbm-laws-reflect-states-targeted-approaches-to-curb-prescription-drug-costs/.

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  52. Pew Charitable Trusts, Use of State Medicaid Inflation Rebates Could Discourage Drug Price Increases (Pew, June 2018), https://www.pewtrusts.org/-/media/assets/2018/06/implementingstatemedicaidinflationrebatescoulddiscouragedrugpriceincreases_factsheet.pdf.

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  53. An Act to Improve Health Care by Investing in Value, Massachusetts Bill H.4134, 191st Legislature (2019).

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  54. Two states have moved forward with a subscription-based model: Louisiana reached an agreement with Gilead to treat more than 31,000 people in the state with hepatitis C under a modified subscription model over the next five years. The agreement allows the state to cap gross spending at a fixed amount. Washington state received approval from CMS to negotiate a fixed annual amount to pay for hepatitis C drugs and entered into a contract with AbbVie. Oklahoma has executed four alternative payment model agreements with manufacturers related to financial outcomes, including adherence, costs and hospitalizations. If the drug fails to meet certain benchmarks, the manufacturer will make additional payments to the state in the form of a supplemental rebate.  Massachusetts, Colorado, and Michigan have received approval from CMS to enter into value or outcomes-based supplemental rebate agreements with drug manufacturers.

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  55. U.S. Senate Committee on Finance, Description of the Chairman’s Mark: The Prescription Drug Pricing Reduction Act (PDPRA) of 2019 (Senate Finance, July 2019), https://www.finance.senate.gov/imo/media/doc/FINAL%20Description%20of%20the%20Chairman's%20Mark%20for%20the%20Prescription%20Drug%20Pricing%20Reduction%20Act%20of%202019.pdf.

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  56. Rachel Sachs, “Understanding the Senate Finance Committee’s Drug Pricing Package,” Health Affairs (July 26, 2019), https://www.healthaffairs.org/do/10.1377/hblog20190726.817822/full/.

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  57. Office of Medicaid, Executive Office of Health and Human Services, MassHealth Section 1115 Demonstration Amendment Request (Commonwealth of Massachusetts EOHHS, Office of Medicaid, September 2017), https://www.mass.gov/files/documents/2017/10/27/masshealth-section-1115-demonstration-amendment-request-09-08-17.pdf.

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  58. Prices negotiated through this demonstration would be exempt from Best Price. These states would also maintain an appeals process for non-covered drugs.

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  59. HHS, Putting America’s Health First: FY 2019 President’s Budget for HHS (HHS, February 2018), https://www.hhs.gov/sites/default/files/fy-2019-budget-in-brief.pdf.

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  60. Office of Medicaid, EOHHS, MassHealth Section 1115 Demonstration Amendment Request (Commonwealth of Massachusetts EOHHS, Office of Medicaid, September 2017), https://www.mass.gov/files/documents/2017/10/27/masshealth-section-1115-demonstration-amendment-request-09-08-17.pdf.

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  61. Division of TennCare, TennCare II Demonstration: Amendment 42 DRAFT (Division of TennCare, September 2019), https://www.tn.gov/content/dam/tn/tenncare/documents2/TennCareAmendment42.pdf.

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  62. Virgil Dickson, “CMS denies Massachusetts’ request to choose which drugs Medicaid covers,” Modern Healthcare (June 27, 2018), https://www.modernhealthcare.com/article/20180627/NEWS/180629925/cms-denies-massachusetts-request-to-choose-which-drugs-medicaid-covers.

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  63. CBO, Incorporating the Effects of the Proposed Rule on Safe Harbors for Pharmaceutical Rebates in CBO’s Budget Projections (CBO, May 2019), https://www.cbo.gov/system/files/2019-05/55151-SupplementalMaterial.pdf.

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  64. 83 Federal Register 54546-54561, (October 30, 2018).

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  65. Office of the Actuary, Financial Impact of Titles I and II of H.R. 3, “Lower Drug Costs Now Act of 2019 (CMS, October 2019), https://www.scribd.com/document/429847530/HR3-TitleI-II-Memo.

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