Drug rebates mean immediate fiscal relief for some Medicaid programs

Much of the hotly debated health care reform legislation won't actually be implemented for months or years, but an expanded drug rebate program is an important exception. States can collect additional rebates right away, which may help some with severe budget shortfalls. The rebates are only for drugs prescribed to enrollees of Medicaid managed care plans, though, so states without managed care won't see any savings.

"The drug rebate savings are effective as of the date of enactment," says Margaret A. Murray, chief executive officer of the Association for Community Affiliated Plans in Washington, DC, which represents nonprofit Medicaid managed care health plans.

"For those plans that currently have managed care programs, this is one of the few places they will immediately see savings from health care reform," says Ms. Murray. "There is some work to do on getting the data from the plans about the drugs they have paid for, but these are immediate savings for this fiscal year."

Previously, drug rebates had been restricted to Medicaid beneficiaries in fee-for-service programs. "This is a major improvement and long-overdue correction," says Ms. Murray. "For states, it will mean substantial savings on prescription drugs. This will help them deal with their tight budgets and allow them to make more rational decisions about their Medicaid programs."

The Medicaid discount provisions are based on the Drug Rebate Equalization Act legislation. However, states that don't have any managed care won't see any savings. "In fact, many of them will see losses, due to the recapture of the drug rebate above 15% and below 23%," says Ms. Murray.

Minnesota's Department of Human Services will collect rebates for drugs dispensed to managed care enrollees dating back to March 23, 2010. "We'll begin the process by working with managed care plans to get data on drugs dispensed, so we can calculate and collect the rebates," says Brian Osberg, state Medicaid director. "We are expecting additional guidance from [the Centers for Medicare & Medicaid Services] in the coming weeks, as we move toward full implementation of this new requirement."

It is too soon to accurately evaluate the fiscal impact this legislation will have for Minnesota's Medicaid program. "We do not yet know if adjustments will need to be made to the capitation rate paid to the managed care organizations," says Mr. Osberg. "We also do not yet know how the new rebate calculations will impact rebate amounts." There is no expectation of being able to collect supplemental rebates on drugs dispensed to managed care enrollees, however. "So, we anticipate that the average rebate per prescription will be lower than what the state receives for drugs dispensed by fee-for-service," says Mr. Osberg. "More detailed data sharing will need to occur between the managed care plans and the state Medicaid agency."

Fiscal impact varies

There are currently 23 states using a carve-in approach, with pharmacy benefits included in capitated contracts. These states should realize "a large and immediate savings from the bill" for prescriptions received by Medicaid managed care health plan enrollees, according to Joel Menges, a managing director at The Lewin Group in Falls Church, VA.

A September 2008 report from The Lewin Group, Analysis of Drug Rebate Equalization Act's Savings to the Medicaid Program, estimated a total Medicaid savings of $12.6 billion over five years from 2009-2013. Since the health reform bill was passed, The Lewin Group has worked with several states to evaluate the financial impact of the specific provisions of the bill.

As for the large federal Medicaid fee-for-service rebates, which have been extended to medications purchased by Medicaid health plans effective as of March 23, 2010, these "often represent more than 30% of the initial amount paid to the pharmacies," says Mr. Menges. "However, in the 13 states now using a carve-out approach, the rebate equalization provisions of the bill will create little immediate fiscal impact on their state budgets, since the large rebates are already being accessed."

While the reform bill also raises the federally mandated minimum rebate levels for prescriptions filled under fee-for-service, the federal government receives 100% of these additional rebates. "Thus, those provisions should have little or no immediate impact on states' fee-for-service budgets," says Mr. Menges.

However, drug manufacturers may negotiate smaller supplemental rebates than are currently in use to offset some of the revenue losses they are experiencing from the bill's Medicaid rebate provisions. For this reason, several states may experience a net additional cost on the medications they are purchasing via their fee-for-service program.

"It is not currently clear whether, or by how much, supplemental rebates will be reduced, as these will be negotiated outcomes between states and the drug manufacturers," says Mr. Menges.

Switch to carve-in?

Previously, Medicaid agencies could either access the best management of the benefit through a "carve-in" approach or the best unit price via a "carve-out" approach, but not both. They were forced to make an "unwelcome choice" between these two options, says Mr. Menges.

"The rebate equalization provisions across fee-for-service and managed care are a significant help to states," says Mr. Menges. "Now, states have access to the strongest pharmacy benefits management and the lowest unit prices, simultaneously."

Equalizing the rebate program removes the incentive to carve out drug benefits, since the states that currently carve drugs out of their capitation won't see savings from the program. For this reason, Ms. Murray says she expects that over time, "many of those states will start to think about carving the drugs back in."

In addition to the savings, carving drugs in allows health plans to access information on the medications a patient is taking. "This means that better care is provided, because health plans can manage the whole person," says Ms. Murray. "They know who's pregnant, because they see someone is on prenatal vitamins. They know who has asthma or who is HIV-positive because of the drugs they are taking. So, they are able to coordinate their care of those populations."

Assuming the 13 states currently carving out the drug benefit do switch to a carve-in approach, Mr. Menges says that costs are likely to decrease due to an increased use of generics and lower-cost brand medications. A decrease in the overall usage rate of prescriptions is also likely. "The at-risk health plans have been shown to achieve a more cost-effective volume and mix of medications than has occurred in the Medicaid fee-for-service setting," says Mr. Menges.

Rebate is shared

Rachel L. Garfield, PhD, an assistant professor in the Department of Health Policy and Management at the University of Pittsburgh's Graduate School of Public Health, says, however, "There are two factors at play here, possibly working in different directions."

One issue concerns how the rebate is shared between states and the federal government. In the past, rebates covered under the agreement with the federal government were split between states and the federal government, according to the state's FMAP.

The new law increases the minimum rebate percentage, but it says that rebate dollars attributed to that increase will go entirely to the federal government. "This means that states will not see funds from the increase in the minimum rebate percentage," says Dr. Garfield.

Further, most states negotiate with drug manufacturers for supplemental rebates in addition to those covered under the agreement with the federal government. "Rebates in many states are already above the new federal minimum rebate percentage," says Dr. Garfield. "Under the law, it appears that these states will lose their share of the rebate between the old and new federal minimum percentage."

Therefore, states are concerned that this provision will lead to a substantial shift in rebate dollars from states to the federal government.

The other factor is related to the extension of the rebate program to drugs covered under agreement with managed care companies. In the past, prescription drugs that were covered under state contracts with Medicaid managed care companies were not eligible for rebates under the federal Medicaid rebate program.

In some states, including Pennsylvania, there was concern that this restriction led the state to lose out on potentially large rebates. "Some states made the decision to exclude prescription drugs from contracts with Medicaid managed care companies in order to claim the drug rebates," says Dr. Garfield.

However, this arrangement was not ideal. Managed care companies have more tools to manage utilization, resulting in lower drug costs, and are able to use prescription drug utilization data for case management.

Since the new law extends the Medicaid rebate program to managed care, states that included prescription drugs in their managed care contracts will see increased rebate dollars. "In addition, states that had made the policy choice to exclude prescription drugs from managed care contracts may revisit this decision and include drugs in the contracts," says Dr. Garfield. "Thus, they will gain the advantages of both the rebate dollars and the care management tools available under managed care."

Contact Dr. Garfield at (412) 383-7279 or rachelg@pitt.edu, Mr. Menges at (703) 269-5598 or joel.menges@Lewin.com, Ms. Murray at (202) 204-7509 or MMurray@communityplans.net. and Mr. Osberg at Brian.Osberg@state.mn.us or (651) 431-2189.