The Medicaid Prescription Drug Rebate Program: An Overview

If you’re frustrated with how expensive many prescription drugs are in the United States, you’re not alone. Almost 80 percent of Americans believe the cost of prescription drugs is unreasonable.

Did you know that U.S. residents spend about $1,200 on prescriptions drugs per year? Some of these are medications people have to have to treat a chronic condition or fight an ongoing infection. Generic ones are typically affordable for most Americans, but brand-name drugs often cost much more. It’s not surprising that one in four people have a difficult time affording their medicine.

For the approximately 64,498,259 individuals enrolled in Medicaid, the program gives them access to otherwise unaffordable healthcare. It’s a valuable resource providing coverage for low-income children, adults, seniors and those with disabilities.

A Key Attempt at Cost-control

An attempt to address the high cost of prescription drugs was made in 1990 by the U.S. government through the Omnibus Reconciliation Act. The goal of this legislation was to make sure Medicaid paid a net price that is consistent with the lowest or best price that manufacturers charge other payers for the drug. The Medicaid statute defines a drug’s best price as “the lowest price available from the manufacturer during the rebate period to any wholesaler, retailer, provider, health maintenance organization, nonprofit entity, or governmental entity within the United States.”

Instituted under the Omnibus Budget Reconciliation Act of 1990 was the Medicaid Drug Rebate Program (MDRP). It assists in offsetting state and federal costs by requiring manufacturers of drugs to pay a rebate for all drugs dispensed to beneficiaries of Medicaid. Sometimes called the “best price rule,” MDRP has been revised over the past 30 years, including some changes from the Affordable Care Act (ACA). Previously, the program only covered beneficiaries of Medicaid fee-for-service, but it now applies to enrollees of Medicaid managed care plans.

As of mid-2019, there are 51 Medicaid programs and 600 drug manufacturers participating in MDRP. These programs operate under CMS guidance, and each manufacturer has to report its corresponding pricing, product information and sales to the agency. Drug manufacturers technically don’t have to participate in MDRP but otherwise are excluded from Medicare and all other federal programs. According to the American Action Forum, all but four states have been able to negotiate supplemental rebates beyond the mandatory minimum rebates required by the MDRP.

Here are a few points from the Kaiser Family Foundation that further explain MDRP:

• Under the program, a manufacturer who wants its drug covered under Medicaid must enter into a rebate agreement with the Secretary of Health and Human Services stating that it will rebate a specified portion of the Medicaid payment for the drug to the states, who in turn share the rebates with the federal government.

• Manufacturers must also enter into agreements with other federal programs that serve vulnerable populations in exchange for Medicaid programs covering most of the manufacturer’s FDA-approved drugs.

• The Medicaid rebate amount is set in statute and ensures that the program gets the lowest price (with some exceptions).

• The formula for rebates varies by brand or generic. For brand name drugs, the rebate is 23.1 percent of Average Manufacturer Price (AMP) or the difference between AMP and “best price,” whichever is greater. For generic drugs, the rebate amount is 13 percent of AMP, and there is no best price provision. 

• The rebate program offsets Medicaid costs and reduces federal and state spending on drugs.

• This approach is different from private insurers who can enter into negotiations with manufacturers about whether or not drugs will be on their formularies, leveraging rebates for drugs that are included or covered with lower patient cost-sharing.

What MDRP Means for Healthcare Consumers and Payers

Although there are improvements that could be made to MDRP, it has resulted in proven benefits for Medicaid enrollees. It has achieved the goal of reducing state Medicaid prescription costs, thereby providing broader access to affordable medications for low-income beneficiaries. It also has lowered the cost for consumers at the point of purchase and resulted in smaller copayments and coinsurance shares for enrollees without a deductible and those who need multiple refills that surpass their deductible.

The rebates received by Medicaid through MDRP allow them to pay one of the lowest prices of any payer. Even though the cost for prescription drugs keeps rising, the program has primarily held Medicaid costs flat over the past few years. In 2016, drug manufacturers paid $31.2 billion in rebates to the federal government and the states, lowering Medicaid prescription drug costs by 51.3 percent.

A drug’s market price affects every payer. Through MDRP, payers that are able to control the costs for healthcare while streamlining administrative spending can still achieve a large profit margin without high-priced premiums.

Initiatives to harness the high cost of prescription drugs will likely continue to the benefit of healthcare consumers. As Donald Kohn mentions in Health Affairs, “Prices for drugs should reflect their value. If price and value become disconnected, efforts to produce new therapies won’t focus on the treatments with the highest net benefit for patients and payers.”

The benefits of MDRP continue to grow with recent, post-Affordable Care Act, Medicaid expansion. Alongside its increased integration with managed care, Medicaid growth has led to more affordable, streamlined services for Medicaid enrollees. At Advanced Medical Reviews, clients ranging from group health plans to managed care organizations have partnered with us to ensure the proper delivery of appropriate medical benefits. Learn more about the comprehensive services we provide for healthcare organizations of all sizes on our newly redesigned website.

Subscribe to our blog to learn more about Medicaid and other issues affecting the healthcare industry.