MACPAC Takes on OIG’s Rebate Rule

If our readers have been paying attention to the news, one thing is apparent: drug pricing is trending.  As we’ve written on here before, the Department of Health and Human Services (HHS) Office of Inspector General (OIG) has proposed significant revisions to the discount safe harbor regulations that protect existing rebate arrangements under Medicare Part D and Medicaid Managed Care.  If finalized, the rule could fundamentally restructure the prescription drug marketplace by realigning economic incentives and encouraging up-front discounts that may reflect lower list prices, as opposed to back-end rebates that are often associated with higher list prices.

But when HHS issued the proposed rebate rule, the agency focused more on the potential effects that the proposed rule would have on Medicare Part D spending, and not so much on the potential effects on Medicaid drug spending.  Today, however, the Medicaid and CHIP Payment and Access Commission (MACPAC) held a public meeting on the proposed rule that shed some light on important considerations relating to Medicaid drug spending if the proposed rule is finalized.

Among the many nuances discussed at the public meeting, one consistent theme prevailed throughout: there’s simply too much uncertainty at this stage, especially in terms of how manufacturers will adjust their pricing practices in response to the rule’s implementation, to precisely predict what the effects on the Medicaid program will be.  That said, the MACPAC staff (Chris Park) did highlight one important mechanic: if manufacturers reduce their list prices in response to the rule’s implementation, then lower list prices will mean a lower Average Manufacturer Price (AMP), which in turn produces lower statutory rebates.  Recall that a brand manufacturer, as a condition of participating in the Medicaid program (i.e. having their drugs covered and paid for by Medicaid), must provide a rebate that is the greater of [AMP times 23.1%] or [AMP minus the “best price”] that the manufacturer offered to a certain class of purchasers in a given quarter.  Thus, if manufacturers shift their pricing from rebates to a lower list price as a result of the rebate rule, then the AMP of a drug would be correspondingly lower, yielding lower rebates to the Medicaid program.

More importantly, however, the MACPAC staff noted that the effect is especially pronounced as it relates to the statutorily-mandated inflationary rebate.  Brand manufacturers, in addition to providing the minimum statutory rebate described above, may also be required to provide an additional “inflation-based rebate” if they increase the price for a covered outpatient drug beyond the rate of inflation (as measured by the CPI-U).  But if manufacturers lower their list prices, than the AMP for a covered outpatient drug may be less likely to reach the inflation threshold (i.e. be greater than CPI-U), which results in less inflation-based rebates to the Medicaid program.  Indeed, the MACPAC staff noted that the Center for Medicare & Medicaid (CMS) Office of the Actuary (OACT) estimated a net increase in Medicaid drug spending of $200 million over 10 years if the proposed rebate rule is finalized.  A large chunk, if not the largest chunk, of this expected increase would come from the decline in inflation-based rebates.

According to the MACPAC staff, the following table illustrates the effect of a 15% decline on Medicaid rebates:

Category Baseline 15% Lower List Price
Baseline AMP 1.00 1.00
Current AMP 1.47 1.25
Baseline CPI-U 151.60 151.60
Current CPI-U 175.00 175.00
Basic Rebate 0.34 0.29
Inflationary Rebate 0.31 0.09
Total Rebate 0.65 0.38
NET COST 0.81 0.87

Source: Milliman. 2019. Impact of potential changes to the treatment of manufacturer rebates.  Brookfield, WI: Milliman.

Another area of interest discussed at the public meeting was HHS’ solicitation of comments on the impact of its proposed rebate rule on supplemental rebate agreements between states and manufacturers.  The MACPAC staff noted that although HHS indicated the proposed rule should not impact supplemental rebate agreements, the agency’s solicitation of comments on the topic indicates that that conclusion may not be definitive.  This is particularly true since supplemental rebate agreements are not explicitly identified in the Medicaid statute (i.e. section 1927), and thus there’s a question of whether they are rebates “required by statute”, which the agency stated are unaffected by its proposed rebate rule.

In the end, the MACPAC Commissioners agreed to submit comments in advance of the proposed rule’s submission deadline of April 8, 2019.  Although MACPAC did not indicate precisely what its comments would encompass, we expect their comments to highlight the significant uncertainty associated with the proposed rebate rule’s effects on the Medicaid program, with a particular focus on the interaction between the Medicaid program’s heavy reliance on rebate mechanisms and a shift towards lower list prices.

One thought on “MACPAC Takes on OIG’s Rebate Rule

  1. Thanks for those insights. Very interesting and very helpful. And also glad to see that others are weighing in about (and admitting) their uncertainty for this potentially very, very significant change.

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