US Budget Deal Subjects Generic Manufacturers to Medicaid Drug Rebate Penalty

The Bipartisan Budget Act of 2015 includes a provision that will require generic drug makers to pay a rebate to Medicaid if the prices of their generic drugs rise at a rate faster than inflation. This rule, called the Medicaid Drug Rebate Program, already applies to brand-name drugs.

The additional rebate for generics will apply to rebate periods starting in the first quarter of 2017. The amount of the additional rebate is equal to the average manufacturer price (AMP) for the current quarter minus the baseline AMP, adjusted for inflation. Meanwhile, the adjustment inflation is calculated as the Consumer Price Index for all Urban Consumers (CPI-U) for the month immediately before the reporting quarter, divided by the baseline CPI-U.

The language of the act reads, “The amount of the rebate specified in this paragraph for a rebate period, with respect to each dosage form and strength of a covered outpatient drug other than a single source drug or an innovator multiple source drug of a manufacturer, shall be increased in the manner that the rebate for a dosage form and strength of a single source drug or an innovator multiple source drug is increased.”

Drug pricing has become a hotbutton issue for the health system. Lawmakers, industry stakeholders, and even presidential candidates have called for generic drug pricing controls. Most recent among the high profile generic drug pricing controversies was the Daraprim price hike by Turing Pharmaceuticals. The company increased the price of the 62-yearold toxoplasmosis standard-of-care drug that doubles as an HIV cotreatment by 5000% overnight. Following outcry, Turing backpedaled on the price hike, but has yet to reveal what the new price will be.

The 2015 budget provision represents the first time that any proposal on the issue has actually been enacted. Estimates from the Congressional Budget Office say that requiring generic drug makers to pay the same rebate as brandname manufacturers would save $12 billion in costs over the next 10 years.

The change could create issues for generic drug makers around updating their Medicaid price reporting systems, determining the potential financial impact of the change, and producing new pricing questions for generic drug launches and market withdrawals.

Chip Davis, president and CEO of the Generic Pharmaceutical Association (GPhA), said in a statement that the budget provision “will reduce patient access to affordable generic medicines.” He has also said that the legislation will discourage manufacturers from entering certain drug class markets.

GPhA instead calls for renewed focus on the Fair Access to Safe and Timely Generics Act. The legislation is billed, in part, as a cost-saving measure. A July 2014 analysis from Matrix Global Advisors found that using restricted-access programs to create hurdles for generic competition costs the US health care system $5.4 billion per year, including $1.8 billion from the federal government. GPhA also recently released its seventh annual “Generic Drug Savings in the US” report, which found that generic drugs constituted 88% of prescriptions dispensed, but only 28% of drug costs overall.

Proposals currently in play in the drug pricing policy space pertain to allowing the Centers for Medicare & Medicaid Services to negotiate Medicare Part D prices directly with manufacturers, allowing drug importations from Canada, requiring manufacturers to provide detailed information on how drug prices are established, and cracking down on pay-for-delay agreements between brand-name and generic manufacturers.