April 23, 2010 - Cash-strapped state Medicaid programs are upset to learn that they will see billions of dollars worth of anticipated new rebates from drug companies wind up instead in the federal treasury under the recently enacted health care reform measure.
Federal regulators are saying they also will take rebate dollars this year from the state supplemental discounts that most states have already negotiated with manufacturers. At least one state, Indiana, cited the situation when it joined 18 others that have gone to court to block the law's implementation.
The Patient Protection and Affordable Care Act raised the Medicaid minimum rebate on most brand-name drugs from 15.1 percent to 23.1 percent of the average manufacturer price (AMP), but limited the increase to 17.1 percent on brand-name clotting factor and pediatric drugs. It also raised the rebate on generic drugs from 11 percent to 13 percent and set rebates on new formulations of existing drugs at the higher 13 percent level.
States initially expected to receive their normal state share of the new revenue from the increased rebates, pegged by the Congressional Budget Office at $38.4 billion over 10 years. The final reform bill, however, sends both the state and federal shares of the increase in the rebates to the federal government.
Change Called a "Small" Price to Pay
A spokeswoman for Senate Majority Leader Harry Reid (D-Nev.) said the change was needed to help pay for a $434 billion, 10-year increase in federal Medicaid funding that is to be used for the new populations covered under Medicaid expansion. She told the Kaiser Health Network that "federalizing the rebate was a small piece compared to the many things we did to help states." States will also benefit from the expansion of the Medicaid rebate program into the managed care area.
In implementing the rebate increase and the new related revenue-sharing provisions, the Centers for Medicare and Medicaid Services (CMS) is telling the states that, for brand-name drugs subject to the 23.1 percent minimum rebate, it will keep the states' 8 percent share of the jump. For brand-name drugs subject to the 17.1 percent rebate and for generic drugs, it will retain an amount equal to the states' 2 percent share of AMP.
In addition, CMS says it will treat Medicaid managed care rebates as it treats fee-for-service rebates, retaining the difference between the old fee-for-service minimum rebate levels and the new minimum rebate levels attributable to both fee-for-service and managed care drugs.
CMS does say it will not retain rebate revenue attributable either to additional rebates based on best price or as a result of the additional inflation-based add-on calculation. In each case, CMS says states can keep their share of rebates above the new minimum rebate levels.
In addition, CMS says states can keep supplemental rebates they have negotiated above the new minimum rebate levels. Most states collect supplemental rebates from manufacturers for brand-name drugs above the federally mandated rebates in exchange for the manufacturers getting their products on state Medicaid preferred drug lists. States depend on those supplemental rebate revenues to help fund their Medicaid programs.
States Nonplused by Concession
States are skeptical they will have much success in negotiating higher supplemental rebates. Ann Kohler, executive director of the National Association of State Medicaid Directors, has acknowledged in press interviews that the states will still be able to keep rebates above 23.1 percent of AMP, but questions how far manufacturers will be willing to go in paying additional supplemental rebates for the privilege of having their products included on Medicaid preferred drug lists.
Kohler also expresses concern that CMS has failed to set out a dispute resolution process to resolve rebate disputes under the new law.
A study conducted for Indiana Family and Social Services Secretary Anne Murphy by the consulting firm Milliman Inc. found the state could forfeit $275 million in anticipated fee-for-service pharmacy rebate revenues over the next 10 years due to the revenue-sharing mandate, and another $120 million to $480 million in rebate revenue from Medicaid managed care drugs.
Indiana Attorney General Gregory Zoeller cited the loss of anticipated Medicaid rebate revenue as a reason for joining the lawsuit by 18 states to stop the reform law from being implemented. Indiana health officials have said the state would have to raise taxes and cut services to offset the lost funds.