Removal of the Medicaid Rebate Cap: Sensible or Nonsense?

Updated on February 20, 2022
Hole torn in a dollar bill with medicaid text

By Cynthia Miller, MD, MPH, FACP

While payers focus on drug-pricing-control legislation related to Medicare negotiating power and capping out-of-pocket spending for Medicare enrollees, they may have overlooked one of the biggest concerns of the pharma space, removal of the Medicaid Rebate Cap. The American Rescue Plan of 2021 introduced a provision to remove the Medicaid Rebate Cap of 100%, effective January 2024.  While some payers have a large amount of Medicaid business, most are minor players in the market. However, this legislation may turn profits upside down for a pharmaceutical company with a significant presence. Experts disagree on whether removing the rebate cap will curb drug spending. In addition, the Congressional Budget Office (CBO) Report 2022 showed slower growth of retail prescription drugs because of generics. The CBO report notes that federal policy like the Medicaid Rebate program contributes to rising drug prices. So, if drug price increases are slowing, and removing the rebate cap may not accelerate that decline, why are we doing it?  Evaluating the role of trust in the pharmaceutical industry may help us understand.

What is the Medicaid Rebate Cap?

The Medicaid Drug Rebate Program was initiated over 30 years ago as part of the Omnibus Budget Reconciliation Act of 1990.  The original intent was 2-fold.  First, it would reduce the rising costs of drugs to Medicaid plans to preserve sustainability. Second, it would lower drug prices overall.  While it successfully allowed Medicaid budgets to recover for a period, it did not result in lower drug prices, as pharmaceutical companies adjusted the list price to account for state rebates. In 2010, the Affordable Care Act changed the program by increasing the minimum rebate of brand-name drugs from 15% to 23.1% and instituting a rebate cap. Congress developed the rebate cap to prevent Medicaid states from recouping more than 100% of the drug cost after best price and additional inflationary fees.  

What would it mean to remove the Medicaid Rebate Cap?

Suppose the Centers for Medicare & Medicaid Services (CMS) penalizes a drug company for increases over inflation and the mandatory rebate.  That amount is more than the total cost of the drug. In that case, the company may pay Medicaid to use their medication. So, it would make sense that pharmaceutical companies that have had significant price increases on drugs that drive Medicaid spending would be most at risk. Of course, the law does not become effective until 2024, so any medication that is about to lose exclusivity will likely not be affected. It is important to note that only 18.5% of manufacturers reached the cap in 2015, so this is not a widespread issue. But for those companies that do, it may affect profits.  

How would this affect pharmaceutical companies?

Pharma argues that removing the rebate cap would lead to higher prices at launch and essentially a “tax” on pharma to participate in Medicaid. This “tax” leads to a more significant cost burden on commercial and Medicare insurers and patients who will feel the brunt of larger drug prices. In addition, it may hinder investment and innovation by decreasing the return on the development of new medications. Higher prices at launch to maintain investment would defeat the purpose of removing the rebate cap.

The problem with removing the rebate cap

Removing the rebate cap may have several unintended consequences. It might create a profit center for states, which benefit significantly from rebates. This profit will incentivize states to incorporate less-restrictive utilization management. Over time, this will increase the costs to pharma, and companies will have to make up the deficit in some other fashion to keep the profit margins attractive to investors.    

Some experts feel removing the rebate cap will do little to lower drug prices. Dickson et al. estimated that Medicaid would have had only $103 million less in expenses without the cap, based on an analysis of the top drugs most likely to be affected.  However, the CBO estimated that $3 billion would be recovered but still accounted for the potential of higher rebates. At this point, whether or not the rebate cap will change drug pricing dynamics remains unknown.  

How will pharmaceutical companies react?

Pharmaceutical companies could elect not to offer rebates on certain drugs, but the government would exclude them from other programs like Medicare, a substantial financial penalty. Pharma could start with higher list prices rather than increasing costs over time, negating the new change’s intent to lower list prices. Pharma could lobby to remove the Medicaid rebate rule altogether, giving pharmacy benefit managers (PBMs) better negotiating power and making room for more value-based agreements. As we move toward more value-based care, this would align with changes in healthcare.  

The complexity of healthcare

There are a couple of overarching concepts from this discussion on the Medicaid Rebate Rule that reflects the function of the healthcare system.

  1. Making one change in a complex system can create unintended consequences that undermine the original purpose. 
  2. Incentives among payers, PBMs, pharmaceutical companies, healthcare systems, and states are not aligned. 

Piecemeal changes to a complex system often do not work, and we must look for ways to align our interests. It is only natural that for-profit companies look for ways to increase revenue based on the current incentive model. By aligning our priorities, we can move toward healthcare based on value and not transaction.

Strategies moving forward: Changing the conversation.

Given the lack of solid evidence that removing the rebate cap will impact drug pricing, one may wonder why we are removing it. Americans remain deeply distrustful of the pharmaceutical industry. This lack of trust fuels pressure for reform, including changes that may be ineffective. This mistrust is partly due to a lack of communication around recent trends in drug pricing, for example, the recognition that high insulin prices may be related to PBM and pharmaceutical rebates rather than list price itself. Recovering that trust in a way that aligns with incentives may be one way to change the conversation. Some value-based considerations that address drug pricing reform and increase confidence in the pharmaceutical industry are as follows: 

  1. Pharma can create new value-based alignments with healthcare systems and payers to encourage innovation for higher-value drugs. These partnerships would also allow for real-world evidence generation and data sharing and begin building a trusting relationship.  
  2. Pharma can also partner with health systems and payers to address social determinants of health to decrease overall out-of-pocket costs for patients receiving high-cost treatments.  
  3. Pharma can address misinformation about drug pricing by educating the public on the multiple stakeholders who play a role in drug costs at the pharmacy counter.  

Aligning incentives, accurate communication, and partnerships may lead to real reform in healthcare. Pharmaceutical companies can help guide the way.  

Cynthia Miller is Vice President, Medical Director, Access Experience Team. She brings over 15 years of experience in the health care field. She has extensive experience in patient care delivery in the outpatient setting, as well as experience in inpatient care, palliative care, and telemedicine. While in practice, she developed a referral program for physicians to the Diabetes Prevention Program through the YMCA for BayCare Health System, located in the Tampa Bay Area. Cynthia most recently practiced telemedicine to support COVID-19 pandemic access to care. Before joining Precision, Cynthia served as the Senior Medical Director of Pharmacy for WellCare Health Plans. In that role, she oversaw prior authorization development, utilization management, Pharmacy & Therapeutics Committee, Drug Utilization Review Committee and the Quality Committee. In addition, she oversaw utilization management of high-cost precision drugs. When Centene purchased WellCare Health Plans, Cynthia moved into the position of Vice President Medical Director. In that role, she built and managed a team of medical directors to insource operations and create synergies for the combined organization.  In addition, she worked closely with the population health team to develop diabetes and cardiovascular health strategies.

At Precision, Cynthia’s areas of expertise are strategic initiatives for access in national health plans and health systems.  Other areas of expertise include population health, healthcare disparities, and chronic disease management.  Key disease and focus areas include diabetes, obesity, pulmonary, oncology, and transplant.

The Editorial Team at Healthcare Business Today is made up of skilled healthcare writers and experts, led by our managing editor, Daniel Casciato, who has over 25 years of experience in healthcare writing. Since 1998, we have produced compelling and informative content for numerous publications, establishing ourselves as a trusted resource for health and wellness information. We offer readers access to fresh health, medicine, science, and technology developments and the latest in patient news, emphasizing how these developments affect our lives.