With the passage of The American Rescue Plan of 2021, President Joe Biden has marked the first legislative achievement of his presidency. With the majority of the USD1.9 trillion bill focused on providing COVID-19 relief, reviving the economy, as well as allocating resources to continue the battle against SARS-CoV-2, very little attention has been paid to another important milestone.

A small provision to remove the cap on Medicaid rebates (estimated to cost the industry billions of US dollars) was added to the bill – marking the administration’s first pharmaceutical pricing and reimbursement (P&R) legislative reform.

Democratic lawmakers took the opportunity to introduce a provision to sunset the rule capping Medicaid drug rebates as of 1 January 2024 for single-source and innovator multi-source drugs. Currently, Medicaid rebates are capped at 100% of the average manufacturer price (AMP) for innovator drugs. However, as of 2024 there will be no ceiling on rebates paid by manufacturers to Medicaid programs.

The Medicaid Drug Rebate Program (MDRP)

Under current law, manufacturers participating in the Medicaid Drug Rebate Program (MDRP) are required to provide a statutory Medicaid rebate of about 23.1% of the list price (AMP) or the difference between AMP and best price (whichever is higher) for most innovator drugs, which is further adjusted by the Consumer Price Index-Urban (CPI-U). The mandatory rebates were created to ensure Medicaid is paying the “lowest” price for prescription drugs sold to any commercial insurer. Manufacturers would also be liable for more rebates if the price increases faster than inflation. In some cases, and particularly for branded drugs whose prices consistently rise faster than the CPI-U, the rebates could exceed the AMP – suggesting that manufacturers would effectively be paying Medicaid for using their drugs! Pursuing above-inflation price increases is a calculated strategy, that would need to be weighed against the benefits of raising list prices to commercial plans.

Biden’s first P&R policy could cut pharmaceutical spending by USD16 billion over 10 years

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The drugs most likely to be affected by the provision are branded drugs that have reached the 100% AMP rebate cap by consistently having list price increases or for which particularly large rebates are provided to other commercial payers. An estimated 2,300 drugs were at the 100% AMP cap in 2019, according to former Health and Human Services (HHS) Secretary Alex Azar. The Congressional Budget Office (CBO) estimates that the cap prevented the collection of an additional USD3 billion in rebates for outpatient drugs in 2019. Removal of the rebate cap would reduce Medicaid spending by USD16 billion over 10 years, according to the CBO (the estimates assumed the cap would be removed as of 2023, although this was later amended in the final version of the bill to begin in 2024).

Rebates play a very critical role in reducing spending for the Medicaid program and have swelled in recent years. In 2018, Medicaid spent USD60 billion on drugs and received USD36.2 billion in rebates, reducing gross drug spending by nearly 60%. There are concerns that the elimination of the cap could lead to higher launch prices for new drugs, or some of the impact being mitigated by increasing costs to commercial plans or Medicare.

Regardless, this is likely only the beginning when it comes to pharmaceutical pricing reforms for the US market under the Biden administration. With the confirmation of Xavier Becerra as HHS Secretary, there is no doubt that the current administration will be actively working towards achieving key items on its healthcare agenda, including strengthening and broadening the Affordable Care Act (ACA), as well as tackling pharmaceutical prices. Biden supports more controversial policies that would allow Medicare to negotiate drug prices directly with drug manufacturers, or establish a pricing review board to ensure drug prices do not exceed a “reasonable price” that could be based on international reference pricing (IRP).

With the introduction of former President Donald Trump’s Most-Favored Nation (MFN) model last year, we noted that the US could be closer than ever to implementing IRP-based P&R reforms, and this risk continues to be elevated under the current administration. While regulatory policies such as MFN could easily be challenged and stalled in court, legislative changes would likely be enduring and transformative for the industry.