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Best price means, for a single source drug or innovator multiple source drug of a manufacturer (including the lowest price available to any entity for an authorized generic drug), the lowest price available from the manufacturer during the rebate period to any wholesaler, retailer, provider, health maintenance organization, nonprofit entity, or governmental entity in the United States in any pricing structure (including capitated payments) in the same quarter for which the AMP is computed. If a manufacturer offers a value-based purchasing arrangement (as defined at 447.502) to all states, the lowest price available from a manufacturer may include varying best price points for a single dosage form and strength as a result of that value based purchasing arrangement.

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Drug prices are at the center of health policy debates at both the state and federal levels. Medicaid provides health coverage for millions of Americans, including many with substantial health needs. Prescription drug coverage is a key component of Medicaid for many beneficiaries who rely on medications for both acute problems and for managing ongoing chronic or disabling conditions. Without Medicaid, many prescription drugs would be prohibitively expensive to low-income beneficiaries. Both state and federal policymakers are undertaking efforts to control prescription drug costs, and there is renewed policy interest in the Medicaid Prescription Drug Rebate Program (MDRP) as part of these efforts. Policymakers are also currently debating significant changes to payment for prescription drugs through Medicare and commercial insurers that may also have implications for Medicaid and the MDRP as well. This brief explains the MDRP to help policymakers and others understand how Medicaid pays for drugs and any potential consequences of policy changes for the program by answering the following questions:

In addition to federal statutory rebates, most states negotiate with manufacturers for supplemental rebates. As of June 2019, 47 states and DC had supplemental rebate agreements in place.15 These supplemental rebates are not subject to the best price floor. States often use placement on a preferred drug list (PDL) as leverage to negotiate supplemental rebates with manufacturers. States encourage providers to prescribe drugs on the PDL over other drugs and create incentives for them to do so if possible. For example, a state may require a prior authorization for a drug not on a preferred drug list. Often, drugs on PDLs are cheaper or include drugs for which a manufacturer has provided supplemental rebates. A few states have used their supplemental rebate authority to negotiate alternative payment models with manufacturers. States have also formed multi-state purchasing pools when negotiating supplemental Medicaid rebates to increase their negotiating power. More than half of states participate in a multi-state supplemental rebate pool.16 In addition, Medicaid managed care plans may negotiate their own supplemental rebate agreements with manufacturers.

Both states and the federal government play a role in administering the MDRP. Manufacturers must report AMP for all covered outpatient drugs to HHS and report their best price for brand name drugs. HHS uses this price data to calculate the unit rebate amount (URA) based on the rebate formula and inflationary component and provides the URA to states.17 States multiply the units of each drug purchased by the URA and invoice the manufacturer for that amount. Manufacturers then pay states the statutory rebate amount as well as any negotiated supplemental rebates.

The Medicaid rebate program interacts with other programs that receive manufacturer discounts on drugs. As a condition of participation in the Medicaid Drug Rebate program, manufacturers must also participate in the federal 340B program. The 340B program offers discounted drugs to certain safety net providers that serve vulnerable or underserved populations, including Medicaid beneficiaries.25 340B ceiling prices are calculated to match Medicaid prices net of the rebate, but manufacturers can provide additional discounts to 340B providers that are not subject to the best price rule.26

Because the 340B program is administered separately, as stipulated by federal law, states and safety net providers must ensure that manufacturers do not pay duplicative discounts for Medicaid beneficiaries.27 Safety net providers eligible for 340B discounts can choose whether or not they provide drugs purchased with the program discounts to Medicaid beneficiaries within state guidelines.28,29 States may require providers to make the same decision for FFS and managed care enrollees to streamline the process of determining which claims are eligible for rebates. To avoid charging manufacturers a duplicate discount, state Medicaid programs reference a list of safety net providers that provided drugs under 340B to Medicaid beneficiaries, and the Medicaid program will exclude their drug claims from their invoices to manufacturers.30 The file does not include drugs paid for by managed care plans or those dispensed at contract pharmacies, but MCOs also are required to exclude 340B claims from reports they provide to states for rebate purposes.31,32 There are concerns the list can be out of date or inaccurate, so some states maintain their own lists or use claims data to avoid duplicate discounts. Although Medicaid best price and 340B ceiling prices are closely related, the rules states set for how they reimburse pharmacies may have implications for drug costs.33,34

One proposed approach is to lift the cap on rebates, which is currently 100% of AMP. Because of rising prices over time, a number of drugs have reached the rebate cap. Increasing or eliminating the cap would generate savings for the program and lower revenues for drug manufacturers.39 The Medicaid and CHIP Payment and Advisory Commission (MACPAC) recommended eliminating the cap entirely.40 A bipartisan bill addressing drug costs passed out of the Senate Finance Committee includes a provision to increase the cap to 125% of AMP.

PBMs have been another area of focus for state efforts to increase supplemental rebates. Much activity in this area involves increased transparency about PBM practices by, for example, requiring PBMs to report their discounts, rebates and profits to the state to ensure that the state is receiving the maximum rebates possible. More than half of states have passed a law addressing some aspect of PBM practices and transparency.51 Other states have enacted or are considering broader transparency laws to obtain pricing information from manufacturers in an effort to better understand prices paid by different parties in the production and payment chain for prescription drugs.

The MDRP helps offset federal and state costs of most outpatient prescription drugs dispensed to Medicaid beneficiaries and ensures access to medication for Medicaid beneficiaries. While gross prescription drug costs continue to grow, the Medicaid Drug Rebate Program has held net Medicaid costs largely flat over the past few years. There continues to be growing national attention around the issue of high drug prices and as a result, both states and the federal government are considering a variety of policies to address prescription drug costs. Because of the key role Medicaid plays in providing drugs for beneficiaries and setting the floor for prices, it is important for policy makers to understand the implications of any proposed policies for the rebate program.

Medicaid Best Price rules are part of the Medicaid Drug Rebate Program (MDRP). At its core, the Medicaid Best Price policy requires manufacturers to provide state Medicaid programs the best price it offers any other purchaser (with certain exceptions). Under the MDRP, manufacturers must enter into a National Drug Rebate Agreement (NDRA) for their drugs to be covered by Medicare and Medicaid. The NDRA requires manufacturers to report certain drug pricing information to CMS and to pay rebates on their products to Medicaid.

The best price is used to calculate the rebate amount owed to state Medicaid programs for brand name drugs. Specifically, for brand name drugs, the manufacturers must pay states a rebate equal to the greater of either:

The rebate calculation also includes an additional inflationary component to account for rising drug prices over time. States also have the option to negotiate supplemental rebates with manufacturers.

Manufacturers and other stakeholders have argued that Medicaid best price requirements (pre-Final Rule) severely hindered the use of VBP arrangements in the commercial space. For example, if a manufacturer sought to offer a commercial plan an outcomes-based contract, where the manufacturer rebates a substantial cost of the drug to the payor in instances where the drug fails to produce a desired outcome, the manufacturer would have to offer that same substantial rebate to all states, regardless of whether the drug produces desired outcomes for Medicaid patients.

Given financial and resource constraints, State Medicaid programs may be unable to take advantage of VBP arrangements, and associated discounted pricing. Even though the Final Rule requires that manufacturers offer states a non-VBP best price if they do not participate in a VBP arrangement, they may still end up paying higher prices, especially if the manufacturers only offer their drugs through VBP arrangements.

In issuing the Final Rule and Guidance, CMS eliminated a significant barrier for manufacturers seeking to enter into VBP arrangements with commercial payors, paving the way for a likely increase in the use of VBP arrangements. Although CMS indicates that it will not get involved in the approval or review of the specifics of any VBP arrangements, it will monitor the implementation of the policy and will make referrals to the Office of Inspector General in cases when they identify concerns with manufacturer price reporting under the MDRP. Manufacturers need to ensure that they maintain appropriate records, including records setting forth their non-VBP best price if no non-VBP best price exists, as CMS will certainly be closely monitoring manufacturers as they begin to implement this new policy. 17dc91bb1f