340B Providers Might Benefit From Closing of Medicaid Rebate “Loophole”
March 30, 2010 – The health care reform package that President Obama signed today contains a little-noticed Medicaid drug rebate provision that could add up to significant savings for 340B providers and the Medicaid program.
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Depending on how much manufacturers raise the prices they charge private purchasers, they may have to pay an additional rebate to Medicaid beyond the basic rebate. Every drug covered by Medicaid has a base-period average manufacturer price (AMP) that is determined by the drug’s original market date and that serves as a reference point for calculating the additional rebate. For a given quarter, no additional rebate is owed if the drug’s current AMP does not exceed its inflation-adjusted base-period level, as measured using the consumer price index for urban consumers (CPI-U). If the AMP does exceed the allowed (inflation-adjusted) level, then an additional rebate is owed that is equal to the excess amount. Example: Suppose that a brand-name drug’s base-period AMP is $1.00 per unit and several years after that base quarter the quarterly CPI-U had increased by a cumulative 14 percent. That means that in the current quarter the manufacturer could have an AMP of up to $1.14 per unit without owing any additional rebate. If the current-quarter AMP was $1.25, however, then the difference of $0.11 per unit would be owed as an additional rebate. Source: Congressional Budget Office |
The language forbids a practice that critics say drug manufacturers can use to avoid paying extra rebates to state Medicaid programs. Manufacturers must make such partial refunds when the average manufacturer price (AMP) of one of their brand-name product lines rises faster than the rate of inflation (see box). Because rebates are calculated separately for each version of the same drug, companies theoretically can skirt the additional rebate requirement simply by altering an existing drug’s strength or dosage form and selling it at a higher price.
One such fairly recent drug reformulation that was widely criticized was the marketing of the proton pump inhibitor Nexium just as the patent for its predecessor, Prilosec, was about to expire.
Office of Inspector General Report
Just days before the House’s historic health care reform vote, the U.S. Department of Health and Human Services’ Office of Inspector General (OIG) issued a report estimating that states could have collected about $2.5 billion in extra rebates between 1993 and 2007 if the potential loophole hadn’t existed. It based its projection on an analysis of the top 150 brand-name drugs ranked by Medicaid reimbursement in 2007. One hundred fourteen had multiple versions and, of those, the prices of the earliest versions of 65 exceeded their inflation-adjusted prices when their successor versions came on the market.
OIG cautioned that it didn’t look into why manufacturers developed the variants of the drugs it studied, saying they “may have valid reasons … for these new versions.” It went on to observe, however, that they possibly might do so “solely to avoid paying rebates when they substantially increase prices.” The inspector general recommended that the Centers for Medicare and Medicaid Services (CMS) seek legislative authority to change the rebate formula and in written comments CMS concurred, saying it hoped Congress would “close this potential loophole.”
Scope Narrowed to Solid Oral Drugs
Congressional Democrats apparently did just that with the health care reform measure that President Obama signed into law this week.
The bills raise the additional rebate for an extended-release or similar new formulation of an innovator drug in oral solid dosage form to the greater of (a) the additional rebate under current law; or (b) the product of the AMP for each dosage form and strength of the new formulation and the highest additional rebate, calculated as a percentage of AMP, for any strength of the original version of the drug.
The budget reconciliation bill passed by the House narrowed the provision’s scope to drugs in oral solid dosage forms and removed an exemption for new formulations of orphan drugs that had been added in the Senate.
The health care bills also cap the overall rebate (basic plus additional) on brand-name drugs at 100 percent of AMP. On a related note, the bills additionally raise the basic rebate on generic drugs from 11 percent to 13 percent of AMP.
The changes are expected to work to 340B providers’ benefit because the 340B drug ceiling price is calculated using the Medicaid rebate formula. Safety-net hospitals and other covered entities currently receive a minimum discount of 15.1 percent off of AMP for brand-name drugs, soon to change to 23.1 percent off AMP under a separate Medicaid rebate provision in the health care reform package. As with the states, 340B providers are entitled to an additional discount if a drug’s price increases faster than the rate of inflation.
Donna Yesner, a partner with the firm McKenna Long and Aldridge who represents numerous drug firms, predicts that the changes to the rebate formula may “discourage investment in new formulations of older drugs that can truly help patients and for which there is a market need.”
Firms reformulate older drugs “because they see business opportunities, not because they want to evade the law,” she says. “In my experience, I have never seen the desire to limit rebates as the primary motive for developing a new formulation of a drug.”