View from Washington – Rebate Debate: Medicaid drug pricing calculations up for discussion

Tucked inside the President’s FY 2007 Budget package of cutting Medicaid by $13.7 billion is an item to amend the Medicaid drug rebate program. This is not the first time such a proposal has surfaced. But given the significance these rebates provide in funding for state Medicaid programs, the proposal to amend the best price calculation is likely to hit some political roadblocks.

In order for drug manufacturers to participate in Medicare, the largest insurer of care, companies must participate in Medicaid, the state-federal sponsored health insurance program for the poor and disabled. Coupled with this mandatory requirement, drug manufacturers must also pay rebates to states to have their outpatient drugs covered in the Medicaid program. Medicaid best price is the lowest price paid to a manufacturer for a brand name drug, accounting for rebates, chargebacks, discounts or other pricing adjustments. Drug prices are lower for other special beneficiaries but are not included for the purpose of calculating best price.

Analysis of the issue
The Bush Administration is seeking to replace the current rebate with a budget neutral flat rebate. The current rate, which is 15.1 percent of the average manufacturer price (AMP) or AMP minus best price, whichever is greater, would be increased. Such an increase was debated in Congress last year, but never enacted. According to the budget proposal, Medicaid best price acts effectively like a price floor, “interfering with the competitive marketplace and preventing manufacturers from negotiating better discounts with large purchasers.”

There is not much enthusiasm at the state level or within the industry to eliminate the best price. The rationale against eliminating best price is that manufacturers aren’t going to expand their discounted price to more entities. If required to do so, the average price will likely increase. State governors would rather see the flat rebate increased.

This proposal will likely meet sharp debates on Capitol Hill. One likely opponent, Rep. Henry Waxman (D-CA), Ranking Minority of the House Government Reform Committee and the recognized author of numerous Medicaid statutes, was not pleased last year when the President’s FY06 budget proposal proposed eliminating the best price provision. He stated, “I oppose these changes. The law guarantees that taxpayers get the best deal, and we should keep the law and make it work. Repealing it would be a huge gift to drug manufacturers.”

Other issues surrounding Medicaid Best Price were identified in a Government Accountability Office (GAO) report released last year. Titled, “Medicaid Drug Rebate Program: Inadequate Oversight Raises Concerns About Rebates Paid to States,” GAO reported problems with the methods used to determine best price, sometimes resulting in states overpaying for prescriptions, and the lack of program oversight.

Given the significance of the funding for state Medicaid programs these rebates provide, it’s likely to set off another round of discussions between President Bush, state governors, and Congress about a program that some economists and policy experts contend raises drug prices across numerous sectors. The argument is that if the best price program were significantly scaled back, drug prices would moderately increase for all sectors including Medicaid. Changing the Medicaid drug rebate program may be good health/economic policy but pursuing it raises political ramifications.

About the Author

Robert Betz Ph.D.
Robert Betz, Ph.D., is president of Robert Betz Associates, Inc. (RBA), a well-established federal health policy consulting firm located in the Washington, D.C. area. Additionally, Dr. Betz is an adjunct professor teaching at The George Washington University where he specializes in political science and health policy. For more information about RBA, visit