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Daniel R. Levinson
Office of Inspector General
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The Medicaid program would have received an additional $1.4 billion in Medicaid rebates on the top 200 generic drugs for 2005 through 2014 if the rebate calculation for generic drugs contained an inflationary factor similar to the rebate calculation for brand-name drugs.
WHY WE DID THIS REVIEW
The Office of Inspector General (OIG) received a congressional request to examine recent increases in the prices charged for generic drugs and the effect these prices have had on generic drug spending in the Medicare and Medicaid programs. In response to that request, OIG has updated a previous review of generic drug price increases under the Medicaid drug rebate program.
The objective of this review was to determine the extent to which generic drug price increases have exceeded the statutory inflation factor used in the rebate calculation for brand-name drugs.
The Medicaid drug rebate program became effective in 1991 (the Social Security Act (the Act) § 1927). For a covered outpatient drug to be eligible for Federal Medicaid funding, the drug’s manufacturer must enter into a rebate agreement that is administered by the Centers for Medicare & Medicaid Services (CMS) and pay quarterly rebates to the States. CMS, the States, and drug manufacturers each have specific functions under the program. Among other things, section 1927(b)(3) of the Act requires a participating manufacturer to report quarterly to CMS the average manufacturer price (AMP) and, if applicable, the best price for each covered outpatient drug.
The Act requires the payment of additional rebates for single-source and innovator multiple-source drugs (collectively, “brand-name drugs”) under certain situations. Section 1927(c)(2) requires manufacturers to pay an additional rebate when the AMP for a brand-name drug increases by more than a specified inflation factor. Generally, the amount of the additional rebate is based on the amount that the drug’s reported AMP exceeds its inflation-adjusted baseline AMP, and manufacturers pay the additional rebate for each unit of the drug reimbursed by Medicaid. The Act does not include a similar inflation-based rebate provision for generic drugs.
A previous OIG report found that generic drug price increases exceeded the specified statutory inflation factor applicable to brand-name drugs for 35 percent of the quarterly AMPs reviewed. If the provision for brand-name drugs had been extended to generic drugs, the Medicaid program would have received additional rebates. We calculated that Medicaid would have received a total of $966 million in additional rebates for the top 200 generic drugs, ranked by Medicaid reimbursement, from 1991 through 2004. We recommended that CMS consider seeking legislative authority to extend the additional rebate provisions to generic drugs. CMS agreed to consider our recommendation when it considered future legislative proposals.
HOW WE CONDUCTED THIS REVIEW
We limited our review to the top 200 generic drugs, as ranked by Medicaid reimbursement, for each year from 2005 through 2014. A total of 869 drugs were in the top 200 generic drugs at least once during the 10 years. We assigned each drug a baseline AMP based on the second quarter that pricing data was reported on CMS’s Medicaid Drug Rebate System for the drug and compared each quarterly AMP to the inflation-adjusted baseline AMP. We then applied the method in the Act for calculating additional rebates on brand-name drugs to the top 200 generic drugs for each quarter that the quarterly AMP exceeded the inflation-adjusted baseline AMP.
WHAT WE FOUND
Generic drug price increases exceeded the specified statutory inflation factor applicable to brand-name drugs for 22 percent of the quarterly AMPs we reviewed. If the provision for brand-name drugs were extended to generic drugs, the Medicaid program would receive additional rebates. We calculated that Medicaid would have received a total of $1.4 billion in additional rebates for the top 200 generic drugs, ranked by Medicaid reimbursement, from 2005 through 2014. The additional rebates for the top 200 generic drugs increased most years, from more than $39 million in 2005 to more than $464 million in 2014.
Our findings are consistent with our previous work and support our prior recommendation that CMS consider seeking legislative authority to extend the additional rebate provisions to generic drugs. On November 2, 2015, the Bipartisan Budget Act of 2015 (P.L. No. 114-74) was enacted and included provisions extending the additional rebate to generic drugs. The additional rebate for generic drugs will apply to rebate periods beginning with the first quarter of 2017. Therefore, we are not making any additional recommendations.
TABLE OF CONTENTS
o Why We Did This Review
Medicaid Drug Rebate Program
Previous Office of Inspector General Report on Generic Drug Prices
o How We Conducted This Review
o Generic Drug Price Increases Exceeded Inflation
o Additional Rebates
o AUDIT SCOPE AND METHODOLOGY