Elimination of Medicaid Rebate Cap in the Latest COVID-19 Relief Package—The First Legislative Action on Drug Pricing Under the Biden Administration

The American Rescue Plan Act of 2021, the US$1.9 trillion stimulus package expected to be passed by Congress and signed into law by President Biden by March 14, 2021, contains the first drug pricing legislative action being taken under the new Biden administration.

The American Rescue Plan Act of 2021 includes a provision that eliminates the statutory cap on rebates drug manufacturers pay to Medicaid. These rebates act as a discount off the purchase price and eliminating the cap means that drug company discounts paid to Medicaid can rise. Prior to this change, drug manufacturers could have paid up to 100 percent of the Average Manufacturer Price in rebates to state Medicaid programs for Medicaid-covered drugs.¹

Starting in January 2024, Medicaid rebates will no longer be capped at 100 percent of the Average Manufacturer Price, which means a manufacturer may in essence have to pay Medicaid when its drug is used.²  The Biden administration removed the rebate cap, which had been in effect since 2010,³  despite reports that net prices for drugs are declining, and despite criticism that eliminating the cap might result in higher initial launch prices for new drugs and cost shifting to commercial insurance and to Medicare.

The removal of this overall limit on Medicaid rebate obligations—which means no ceiling on the discounts drug companies pay to the state—marks the Biden administration's first legislative action on drug pricing. The action is in line with President Biden's campaign proposals on drug pricing, but whether this action signals more activity at the federal level on drug pricing in 2021 remains unclear.

In 2020, most of the drug pricing activity was at the state level, as efforts by the Trump administration eventually stalled in court or were put on hold by the Biden administration, although the December 2020 COVID-19 relief package included provisions directed at increasing drug price transparency.⁴

The Medicaid Rebate Cap

The Medicaid Drug Rebate Program was created to ensure that Medicaid pays the lowest or best price a manufacturer charges other payers for the drug, and it requires manufacturers to pay set rebates off the Average Manufacturer Price ("AMP"), or the difference between the AMP and best price,⁵ whichever is greater, for brand drugs purchased by Medicaid.⁶  The AMP is the average price paid by wholesalers and by retail community pharmacies that purchase drugs directly from manufacturers.⁷ 

Medicaid also requires manufacturers to pay an additional rebate when the price of a drug increases faster than the rate of inflation, which acts to essentially limit price increases for Medicaid to the rate of inflation.⁸  Since 2010, pursuant to Section 1927(c)(2)(D) of the Social Security Act, the total Medicaid rebate amount a drug manufacturer was required to pay was capped at 100 percent of the AMP,⁹  so that manufacturers would never have to pay a rebate higher than the statutory average purchase price. Accordingly, once the total rebates a manufacturer pays to Medicaid for a drug reaches the 100 percent rebate cap, the manufacturer is not required to pay additional rebates if the drug price continues to outpace inflation.

Overview of the Legislative Change

The American Rescue Plan Act of 2021, in Section 9816, terminates Section 1927(c)(2)(D) of the Social Security Act at the end of 2023, which will eliminate the rebate cap of 100 percent of the AMP.¹⁰  The House Committee on Energy and Commerce proposed the new provision in the 2021 legislation as a part of its broader legislative recommendations for the Medicaid program under Congress's budget reconciliation directive.¹¹

Implications

1.  Implications of Medicaid Cap Removal

Without a cap on the rebates drug manufacturers are required to pay under Medicaid, manufacturers may be required to compensate states in an amount greater than what the state Medicaid programs pay for the drug. This could effectively mean that drug manufacturers might have to pay states for the use of certain drugs in their Medicaid programs, which already pay the lowest price across federal programs due to the effect of statutorily required rebates.¹²  

The policy change will have the largest impact on brand drugs whose prices have been or will be consistently raised and have reached the 100 percent rebate cap.¹³  Former Health and Human Services ("HHS") Secretary Alex Azar reported that in 2019 more than 2,300 drugs were at the 100 percent cap on rebates.¹⁴  When a brand drug reaches the 100 percent rebate cap, under existing law, the brand drug manufacturer is already effectively receiving zero net revenue from Medicaid use of the drug and in some instances may be providing the drug to the states for free (before considering any fees paid to pharmacies for dispensing).

Proponents view the elimination of the cap as a way not only to lower net prices for states through rebates that could potentially be greater than the purchase price, but also to deter further steep price increases.¹⁵  The Congressional Budget Office estimates that removing the cap on rebates would save the federal government approximately US$15.9 billion over the ten-year period 2021 – 2030.¹⁶ Commentators, however, doubt that removing the rebate cap will change the calculus for the broader drug market because Medicaid makes up only about ten percent of it.¹⁷

Pharmaceutical manufacturer trade groups, such as the Pharmaceutical Research and Manufacturers of America (PhRMA), have criticized the elimination of the rebate cap, highlighting reports that indicate removing the cap may lead to higher launch prices, increased costs for commercial and Medicare buyers, and decreased innovation on drugs that have high Medicaid usage.¹⁸  Further, reports have shown that the net price of drugs has declined in the last two years, while overall health care price growth has increased.¹⁹  Despite reports of a decline in net drug prices and criticism of eliminating the 100 percent rebate cap, the provision passed through the House and the Senate and is expected be approved by the House pursuant to the budget reconciliation procedure, and to be signed into law by President Biden by March 14, 2021.

2.  Looking Forward on Drug Pricing Regulation Under the Biden Administration

Elimination of the Medicaid rebate cap provision is the first legislative measure under the Biden administration on drug pricing.

Lowering drug prices was a key policy goal of the Trump administration; however, the administration largely failed to achieve its objectives. Notably, President Trump issued four executive orders in the last months of his term that made headlines as they focused on reducing the cost of insulin and injectable epinephrine to low-income individuals, allowing importation of drugs from other countries at lower prices, eliminating the anti-kickback safe harbor protections for rebates paid to pharmacy benefit managers and insurers but allowing rebates to consumers at the point of sale, and establishing a most favored nation ("MFN") pricing model for Medicare drug payments based on international drug prices.²⁰

Each of these executive orders reached the rulemaking stage in the waning days of the Trump administration but received criticism and concern from major industry stakeholders and ultimately stalled.²¹  The rules relating to the rebate safe harbor, the MFN model, and drug importation faced numerous legal challenges from industry trade groups, with courts delaying implementation of the rebate rule and enjoining implementation of the MFN rule.²² President Biden paused the rulemaking procedure for all four late-issued rules from the Trump administration until March 22, 2021.²³ 

While it remains to be seen whether the Biden administration will go forward with any of the rules begun under the Trump administration, or with any other initiatives on drug pricing advanced by the previous administration, drug pricing and lowering health care costs were a central point of the Biden campaign. President Biden has said that he supports several proposals to address public concern about high drug pricing, including requiring manufacturers to pay a Medicaid-style inflationary rebate for Medicare, allowing Medicare to negotiate rebates directly with manufacturers, and international reference pricing for newly launched specialty drugs.²⁴

Further, while the CARES Act was silent on drug pricing and instead focused on the drug supply chain,²⁵ the COVID-19 relief package passed in December of 2020 contained provisions related to drug pricing transparency, including reporting by health plans on the cost of their highest-spend drugs and the impact manufacturer rebates have on premiums.²⁶  The Medicaid rebate provision in the American Rescue Plan Act goes a step further by acting to regulate rebates paid by manufacturers.

_{1 42 U.S.C. § 1396r–8(c)(2)(D) (2020).
2 S. Amend. 891, 117th Cong. § 9816 (2021) (amending American Rescue Plan Act of 2021, H.R. 1319, 117th Cong. § 3106 (2021)). The Senate amended the effective date of the rebate cap elimination in the House passed bill from 2023 to 2024.
3 Patient Protection and Affordable Care Act, Pub. L. No. 111-148, 124 Stat. 119, 309 (2010).
4 See Consolidated Appropriations Act, 2021, H.R. 133, 116th Cong. div. BB § 204 (2020) (enacted).
5"Best price" is defined as "the lowest price available from the manufacturer during the rebate period to any wholesaler, retailer, provider, health maintenance organization, nonprofit entity, or government entity within the United States." 42 U.S.C. § 1396r-8(c)(1)(C).
6 The rebate amounts are specified in statute. 42 U.S.C. § 1396r-8(c). For example, Medicaid requires a minimum 23.1% rebate of the Average Manufacturer Price ("AMP") on brand drugs (or single source and innovator multiple source drugs). Id.  The rebate is 13% for generic drugs (or non-innovator multiple source drugs) with no best price component. Id.
7 42 U.S.C. § 1396r–8(k)(1).
8  The additional inflationary rebate originally only applied to brand drugs, but since January 1, 2017, applies to generic drugs as well. See Bipartisan Budget Act of 2015, Pub. L. No. 114-74, 129 Stat. 584, 596¬¬–597 (2015).
9 42 U.S.C. § 1396r–8(c)(2)(D).
10 S. Amend. 891 § 9816 ("Section 1927(c)(D) of the Social Security Act (42 U.S.C. 1396r–8(c)(2)(D)) is amended by inserting after "December 31, 2009," the following: "and before January 1, 2024,".").
11 See Staff of H. Comm. on Energy and Com., 117th Cong. Budget Reconciliation Legislative Recommendations Relating to the Medicaid Program under Title XIX of the Social Security Act, Subtitle B § 3107 (Comm. Print 2021).
12 Cong. Budget Off., A Comparison of Brand-Name Drug Prices Among Select Federal Programs 14, 21–22 (Feb. 2021), https://www.cbo.gov/system/files/2021-02/56978-Drug-Prices.pdf.
13 A drug reaches the 100 percent rebate cap when its price increases substantially over inflation due to the additional inflationary rebate the manufacturer is required to pay in that instance. The additional inflationary rebate is calculated by determining the amount by which the drug’s current quarter AMP exceeds its baseline AMP adjusted to the current period by the Consumer Price Index for All Urban Consumers (CPI-U).  42 U.S.C. § 1396r-8(c)(2).
14 American Enterprise Institute, Sec. Alex M. Azar II: Fixing Health Care, YouTube 31:00–32:00 (May 16, 2018).
15 See, e.g., Medicaid and CHIP Payment and Access Comm’n (MACPAC), Report to Congress on Medicaid and CHIP xiv (June 2019), https://www.macpac.gov/wp-content/uploads/2019/06/June-2019-Report-to-Congress-on-Medicaid-and-CHIP.pdf (MACPAC’s recommendation to Congress to eliminate the Medicaid rebate cap).
16 Cong. Budget Off., Cost Estimate; Reconciliation Recommendations of the House Committee on Energy and Commerce (Feb. 12, 2021), https://www.cbo.gov/system/files/2021-02/EnergyandCommerceReconciliationEstimate.pdf. 
17 Sarah Karlin-Smith, Medicaid Rebate Reform: A Sign of Minimal Drug Pricing Threats or a Warning of More to Come?, Pink Sheet (Feb. 11, 2021).
18 See Pharm. Rsch. and Mfrs. of America, Comments of the Pharmaceutical Research and Manufacturers of America Concerning HHS Blueprint to Lower Drug Prices and Reduce Out-of-Pocket Costs 7, 73–74 (July 16, 2018), https://www.phrma.org/-/media/Project/PhRMA/PhRMA-Org/PhRMA-Org/PDF/P-R/PhRMA-RFI-Comments-on-HHS-Blueprint-to-Lower-Drug-Prices-and-Reduce-Out-of-Pocket-Costs5.pdf. 
19 See, e.g., Adam J. Fein, Surprise! Brand-Name Drug Prices Fell (Again) in 2020, Drug Channels (Jan. 5, 2021), https://www.drugchannels.net/2021/01/surprise-brand-name-drug-prices-fell.html; Corwin Rhyan et al., Records are Set as Health Care Price Growth Increases to Kick off 2021, Altarum (Feb. 19, 2021), https://altarum.org/sites/default/files/uploaded-publication-files/SHSS-Price-Brief_February_2021.pdf.
20 Michael Gallagher et al., Uncertainty on Drug Pricing Remains Following Trump Administration Executive Orders, White & Case LLP (July 29, 2020), https://www.whitecase.com/publications/alert/uncertainty-drug-pricing-remains-following-trump-administration-executive-orders?s=drug%20pricing.
21 See Michael Gallagher et al., Trump Administration’s Eleventh-Hour Drug Pricing Regulations Face an Uncertain Path Forward, White & Case LLP (Dec. 3, 2020), https://www.whitecase.com/publications/alert/trump-administrations-eleventh-hour-drug-pricing-regulations-face-uncertain-path; Implementation of Executive Order on Access to Affordable Life-Saving Medications, 85 FR 83822 (Dec. 23, 2020) (to be codified at 42 C.F.R. pt. 51); Importation of Prescription Drugs, 85 FR 62094 (Oct. 1, 2020) (to be codified at 21 C.F.R. pt. 1, 251).
22 See, e.g., Order Granting Mot. for Prelim. Inj., Cal. Life Scis. Ass’n v. Azar, No. 20-cv-08603 (N.D. Cal. Dec. 28, 2020) (enjoining implementation of the MFN model rule); Order, Pharm. Care Mgmt. Ass’n v. U.S. Dep’t of Health and Hum. Servs., No. 21-95 (D.D.C. Jan. 30, 2021) (delaying implementation of rule to remove anti-kickback safe harbor for rebates until January 1, 2023, and requesting status update on rule by April 1, 2021); Compl., Pharm. Rsch and Mfrs. of America v. U.S. Dep’t of Health and Hum. Servs., No. 20-cv-03402 (D.D.C. Nov. 23, 2020) (challenging rule to allow importation of drugs from Canada).
23 See Memorandum from Ronald A. Klain, Assistant to the President and Chief of Staff, to the Heads of Executive Dep’ts and Agencies on Regulatory Freeze Pending Review (Jan. 20, 2021), https://www.whitehouse.gov/briefing-room/presidential-actions/2021/01/20/regulatory-freeze-pending-review/.
24 See The Biden Plan to Protect & Build on the Affordable Care Act, Sec. III, https://joebiden.com/healthcare/; Juliette Cubanski et al., A Status Report on Prescription Drug Policies and Proposals at the Start of the Biden Administration, Kaiser Family Found. (Feb. 12, 2021), https://www.kff.org/medicare/issue-brief/a-status-report-on-prescription-drug-policies-and-proposals-at-the-start-of-the-biden-administration/.
25 See Michael Gallagher et al., Impact of the CARES Act on the Pharmaceutical and Medical Devices Industries, White & Case LLP (Mar. 27, 2020), https://www.whitecase.com/publications/alert/impact-cares-act-pharmaceutical-and-medical-devices-industries.
26 See H.R. 133, div. BB § 204}.
 

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