By Karin Rives
The Medicaid rebate and 340B programs could save billions of dollars each year if Congress required drug companies to increase the minimum discounts they must provide to these programs, according to a new report by the non-partisan Congressional Budget Office (CBO). In its annual “Budget Options” report, CBO laid out 115 options for reducing federal spending on health care to try to stem the soaring national deficit, and to help pay for higher expenditures in some health care areas.
Not lost on drug manufacturers – or state Medicaid agencies – were the options to hike rebates that pharmaceutical companies pay states for brand-name drugs in the Medicaid program. While the 340B program was not specifically mentioned in the analysis, 340B-covered entities would presumably also benefit from a rebate increase. The 340B program uses the same formula as Medicaid to determine 340B discounts, although 340B discounts are provided on the front end rather than as a rebate.
Congress has come close to increasing the rebate percentage in the past, but these legislative efforts never made it to the White House. With a new administration and a stronger Democratic majority in Congress, reform proposals such as extending federally sponsored coverage to the uninsured, expanding the Medicaid rebate program, and increasing the government’s role in the Medicare Part D program have a realistic chance of enactment for the first time in years.
That could also shift a heavier burden onto the drug industry at a time when manufacturers say they are increasingly pinched by the recession. Cash-strapped state governments and 340B covered entities, on the other hand, would welcome the fiscal relief.
Asking drug makers for more
By raising the minimum Medicaid rebate that drug companies pay Medicaid from 15.1 percent to 23.1 percent of the average manufacturer price (AMP), CBO estimates that the federal government alone could save as much as $7.2 billion between 2010 and 2019.
As expected, budget analysts also pondered how to squeeze more money out of Medicare Part D, the expensive prescription drug benefit that covers 25 million seniors and will cost the federal government $49 billion-plus this year. A 2007 study showed that manufacturers gave an average rebate of 8.1 percent for drugs covered by Medicare Part D. By requiring drug makers of brand-name drugs to pay a rebate of at least 15 percent, the government would save a whopping $110 billion between 2010 and 2019, CBO said.
This would, in turn, help pay for new ticket items such as the elimination of the so-called “donut hole” in the Medicare Part D drug program. Patients fall into the hole when they have reached a certain drug spending threshold and become responsible for 100 percent of their costs until they reach a new “catastrophic” level and Medicare kicks back in.
But proposals to raise rebates come at a bad time for drug manufacturers, which are affected by the global financial crisis along with slowing sales and downward price pressures from generics. Together, large manufacturers such as Merck, Astra-Zeneca, Schering-Plough, Wyeth, UCB Pharma and Abbott slashed tens of thousands of jobs in 2008. Just since January, Pfizer has announced it will cut 8,800 jobs.
Add higher rebates to the mix, and manufacturers may begin to seriously curtail drug development to the detriment of patients worldwide, warned PhRMA, a trade organization representing the nation’s largest manufacturers.
PhRMA: Higher rebates come at a price
“An increase of the Medicaid rebates on the pharmaceutical industry could chill future development of new medicines,” Ken Johnson, PhRMA’s senior vice president, warned in a statement to the Monitor.
PhRMA’s members “already pay large rebates that produce significant savings to the Medicaid program and current law requires that pharmaceutical companies pay an additional rebate to Medicaid if their average manufacturer price increases faster than inflation,” he noted.
“In addition, Congress just made changes to the rebate formula in the Deficit Reduction Act of 2005, which increased the rebate obligations for some companies. We do not believe that increasing this rebate tax is an appropriate way to pay for other discretionary programs.”
Most state Medicaid programs have, in fact, already implemented supplemental rebates that exceed 23 percent in return for buying pharmaceuticals from so-called preferred drug lists. Ann Kohler, director of the National Association of State Medicaid Directors, said her organization would not favor any reform that undermines such deals. “But to the extent that we can still get the rebate supplement, we support higher rebates through state or national efforts,” she said.
Asking drug makers to contribute more is fair, Kohler added, considering the harsh budget situations many states find themselves in today.
Best Price: Keep or save?
Today, the Medicaid rebate and 340B programs receive the lower of a minimum discount of 15.1 percent of the AMP or a manufacturer’s “best price” in the private sector for brand-name drugs. For the past several years, the Bush administration sought to eliminate the best price provision and to increase the rebate percentage to make up the difference. The proposal never made it through Congress because of stiff opposition from state Medicaid programs and 340B providers.
If Congress were to increase the rebate percentage from 15.1 to 23 percent but also eliminate best price, it would only save $1.2 billion over the next decade, according to CBO.
“I think it’s helpful to know what the options are and to have some dollars attached to them,” said Meg Murray, chief executive officer of the Association of Community Affiliated Plans, a group pushing to extend Medicaid rebates to Medicaid managed-care plans. Her group’s legislation, the Medicaid Drug Rebate Equalization Act, would save the federal and state governments up to $11 billion over 10 years, Murray said. The current economic climate makes it hard for Congress to ignore such savings, she said.