Inflationary Rebates for Generic Drugs Offset Medicaid Spending

Inflationary rebates for generic drugs helped offset Medicaid spending from 2017 to 2020, but additional policies are needed to improve generic competition, according to a study published in Health Affairs.

Competition from generic drugs helps reduce spending on expensive brand-name drugs. Between 2014 and 2017, one in five generic drugs doubled in price over one year, leading to $1.5 billion of excess Medicaid spending.

The Bipartisan Budget Act of 2015 extended inflationary rebates under the Medicaid Drug Rebate Program to generic drugs starting in 2017 to help limit Medicaid spending when drug prices increase. Before this, generic drugs were subject to a baseline rebate of 13 percent of the average manufacturer price (AMP).

Researchers used Medicaid State Drug Utilization and CMS data to assess the economic impact of Medicaid inflationary rebates for generic drugs between 2017 and 2020.

They looked at three different drug price measures: AMP or the average price paid by pharmacies that purchase the drug directly from a manufacturer, the National Average Drug Acquisition Cost (NADAC) or the price paid by independent and chain retail pharmacies, and the average spending per unit reimbursed by state Medicaid programs.

Researchers obtained spending and utilization data for 33,656 national drug codes (NCDs) between 2017 and 2020. The median Medicaid reimbursement per prescription was $18. Total Medicaid generic drug spending over the four years was $53.6 billion, ranging from $2.9 billion to $4.1 billion per quarter.

AMP estimates were available in at least one quarter for 20,353 generic NDCs, representing $29.8 billion of gross generic drug spending. NADAC values were available for 27,583 NDCs, accounting for $43.2 billion of generic drug spending.

The percentage of generic drugs with non-zero inflationary rebates in each quarter across the study period ranged from 14 percent to 33 percent. Around half of the drugs owed inflationary rebates when they were calculated using AMPs (46 percent) and average Medicaid reimbursement (51 percent). A third of drugs had inflationary rebates when NADACs were used for calculations.

Inflationary rebates calculated using AMPs totaled $516 million between 2017 and 2020, offsetting 1.7 percent of the $29.8 billion pre-rebate Medicaid spending on generic drugs. In comparison, the baseline rebates of 13 percent of AMP totaled $1.7 billion or 5.7 percent of spending.

When using NADAC values, the total inflationary rebates were $1.5 billion, representing 3.5 percent of the $43.2 million in Medicaid spending. The baseline rebates totaled $3.5 billion or 8.2 percent of spending.

When using average Medicaid reimbursement prices, inflationary rebates totaled $6.5 billion or 12.1 percent of spending, while baseline rebates were $7.0 billion or 13 percent of spending.

Rebates were higher for drugs that were not orally administered, the study found. Using average Medicaid reimbursement, orally administered drugs accounted for 68 percent of drugs with rebates but only 30 percent of the total rebate amount. Meanwhile, injected drugs accounted for only 18 percent of drugs with rebates and 61 percent of the rebate amount.

Rebates were also concentrated among drugs with the highest use and prices. When using average Medicaid reimbursement to calculate rebates, drugs with 5,000 or more prescriptions per quarter accounted for 14 percent of rebated drugs but 67 percent of rebates. Drugs costing Medicaid $50 per prescription or more accounted for 28 percent of rebated drugs but 78 percent of total rebates.

The study findings suggest that some generic manufacturers continued to raise drug prices despite Medicaid implementing inflationary rebates in 2017.

“This may be because Medicaid represented only 10 percent of the prescription drug market, so Medicaid rebates were more than offset by higher revenue from private insurers and Medicare, which were not subject to inflationary rebates,” researchers wrote.

The Inflation Reduction Act of 2022 implemented similar inflationary rebates in Medicare, but it may still not be enough to stop manufacturers from raising prices.

“Inflationary rebates do not address the root causes of market failures that lead to rising generic prices, and it will be important for policymakers to ensure that the implementation of inflationary rebates now across both Medicare and Medicaid does not lead to market exits and shortages of essential generic drugs,” the study stated.

Future initiatives should target drugs with little or no generics, as prices are lower when more generic options are available.