The recently signed health care reform law will enable private payers to seek deeper discounts on drugs than they often can now, because the law, in effect, creates a lower "best price" floor for drugs by increasing the base Medicaid drug rebate to 23.1 percent.

"The change in the Medicaid rebate level is going to create an opportunity for managed care organizations to put more pressure on manufacturers to drive up their discount," David Womelsdorf, a partner in Ernst & Young's Life Sciences practice, said in an interview. "So you're not only pushing up the discount towards the government but also for managed care."

Currently, manufacturers must provide a rebate on drugs used in Medicaid of 15.1 percent off of average manufacturer price, or if they offer a price that is lower than that to anyone outside of Medicaid, they must provide a rebate that is the difference between AMP and that best price.

Medicaid is a big enough program for manufacturers to shy away from offering prices to private payers that would break best price. Since the new law increases the rebate to 23.1 percent, the best price threshold will drop to that new discount off of AMP.

[Editor's note: For a list of all of the Medicaid and other provisions affecting the pharmaceutical industry, see our ¹ 'Timeline Of Pharma Provisions' chart in "The Pink Sheet," March 29, 2010.]

Other industry consultants agree with this assessment of the new provision's impact.

Lauren Barnes, a consultant with Avalere Health, said, "It is quite possible that in the future manufacturers may consider going up to the new 23 percent when they're negotiating with private payers. And, on the flip side, private payers ... may say, 'You can now go up to 23.1 percent without breaking best price, so we'd like you to increase your discounts for our population, and we know you don't have that excuse any more.'"

And Bill Sarraille, a partner in the Washington, D.C., office of the law firm Sidley Austin, said the change "is necessarily going to affect commercial rebate negotiations. I don't think there's any doubt about that."

One large health insurer said that it expects to benefit from bigger discounts on drugs as a result of the Medicaid rebate change, but still believes that overall the new law will have a negative effect on its own business.

However, Barnes suggested that if payers push for deeper discounts, manufacturers should "be thinking of a quid pro quo back for that," such as better formulary tier placement for the discounted product, removal of rules requiring prior authorization for payment or even moving a competitor off of a favorable tier level.

Different Effects On Different Drugs

Of course, not all drugs will be subject to the same level of additional pricing pressure. If the drug is in a competitive therapeutic class, the manufacturer is possibly already offering more than the 15.1 percent base discount to payers.

Barnes noted that "a lot of manufacturers are already paying rebates greater than this 23.1 percent because they either have broken best price or have [consumer price index] penalties [for raising AMP at a rate higher than inflation]. So the actual incremental difference in Medicaid rebates for a lot of these companies may be nothing."

Womelsdorf added that "you could have a therapeutic class where the leading product is already at a 30 percent discount, so there would be no impact. But there are many classes where the discount is at 15.1 percent and it's going to 23.1 percent, and its going to have a 53 percent impact on companies."

So the biggest jump in discounts could come for those products that stand alone in a class or otherwise have minimal competition.

Sarraille noted that the best price floor is especially strong for "branded products that are earlier in their life cycle and enjoy a greater power within the marketplace because of their novelty and the lack of additional alternatives around the best price point."

Overall, large manufacturers are concerned about the dilutive effect of the increased rebate level on earnings, Womelsdorf said. "The impact will vary by therapeutic classes, by products, by companies, that's true, but net/net, it's a substantial impact on companies."

Companies whose products have high Medicaid utilization may be especially vulnerable. For example, antipsychotics are used at a higher rate among Medicaid recipients than the general population. Such companies "are probably the ones looking at this most closely and who the private payers will go after first," Barnes said.

The hit to earnings will be felt over the next several years, since the changes to Medicaid rebates in the law all take effect in 2010, while the expansion of individuals newly eligible for Medicaid coverage and the expansion of the general insured population that are expected to balance those losses will not start until 2014.

New Rebates Retroactive To Jan. 1, Except One

President Obama signed the health care reform bill into law on March 23. He signed changes to that bill into law on March 30 in the form of the budget reconciliation bill.

There are four Medicaid rebate provisions in the law. The first increases the base rebate amount manufacturers must pay states for outpatient brand drugs received by fee-for-service Medicaid beneficiaries from 15.1 percent of average manufacturer price to 23.1 percent. The second raises the base rebate amount for generic drugs from 11 percent to 13 percent. In the third, rebates for new formulations of oral solid dosage forms of drugs would be based on the AMP of the original formulation.

For these three provisions, the law directs that the rebate will apply to drugs paid for by state Medicaid programs "after Dec. 31, 2009." As a result, those rebates will be applied retroactively. Manufacturers will need to make additional payments for the difference between the old and new rates back to the beginning of the year.

The fourth provision applies the base rebate amount of 23.1 percent to drugs provided to enrollees in Medicaid managed care organizations. Before the new law, Medicaid MCO drugs were not included in manufacturers' Medicaid rebate agreements. Unlike the other rebate provisions, no start date was specified for this provision. In an e-mail to "The Pink Sheet," CMS confirmed that this means the effective date of the provision will be the date of the health reform bill's enactment: "The effective date of the MCO rebates is March 23, 2010."

The impact is that for products provided through MCOs, drug manufacturers will not be liable for retroactive rebates for nearly one-quarter of the year.

Still, the MCO provision will likely be the most difficult of the new rebate provisions to implement operationally. Under the Medicaid MCO program, manufacturers negotiate drug prices with MCOs that have contracts with states to provide Medicaid services. The new provision will involve reviewing these manufacturer contracts in each state.

Bonnie Washington, a consultant with Avalere Health, said in an interview that "increasing the base rebate from 15.1 percent to 23.1 percent in fee-for-service Medicaid ... is pretty simple. It's math. But I think extending that rebate to all of the beneficiaries that are in Medicaid managed care organizations is pretty complex operationally, and so I think that [CMS] will definitely have to put out some guidance about how the retroactive portion of that is going to happen."

In addition, the new law redefines how AMP is calculated. It clarifies the calculation of AMP to exclude customary prompt pay discounts, service fees and reimbursement for unsaleable returned goods that manufacturers make to wholesalers; defines the term "retail community pharmacy" to exclude mail-order and institutional pharmacies when collecting AMP data; and clarifies how AMP data is to be disclosed to the public.

The changes in the calculation of AMP will also "increase costs to pharmaceutical companies," Womelsdorf said.

- Scott Steinke ( ² s.steinke@elsevier.com )

Higher Medicaid Rebates Expected To Boost Private Payer Discounts Too

More from Archive

More from Pink Sheet