Bipartisan Budget Bill Extends Medicaid Drug Rebate Program Price Increase Penalty to Generic Drugs

By David C. Gibbons & Alan M. Kirschenbaum –

At 3 am on October 30, 2015, the Senate passed H.R. 1314, the Bipartisan Budget Act of 2015 (“BBA”), which had already passed the House on October 28, and is expected to be signed imminently by the President.  Section 602 of the bill amends the Medicaid Drug Rebate Program (“MDRP”) to impose a price increase penalty on generic drugs.

In order to have their drugs reimbursed by the federal government under Medicaid and Medicare Part B, manufacturers are required to enter into a Medicaid rebate agreement with the Department of Health and Human Services (“HHS”) in which the manufacturer agrees to pay rebates to states each quarter on units of the manufacturer’s outpatient drugs that are dispensed to Medicaid beneficiaries.  The base rebate for a single source drug or innovator multiple source drug – i.e., a drug approved under a new drug application – is generally the greater of 23.1% of the Average Manufacturer Price (“AMP”) or AMP minus best price.  For noninnovator multiple source drugs – generally drugs approved under an abbreviated new drug application – the base rebate is 13% of AMP.  42 U.S.C. § 1396r-8(c).  In addition to the base rebate, innovator drugs are subject to an additional rebate if the AMP for a given quarter exceeds the inflation-adjusted baseline AMP, which for most drugs is the AMP for the first full quarter after launch.  Until now, this price increase penalty has applied only to innovator drugs. 

Congress has been concerned about the rise in generic drug prices.  In February 2015, Representative Cummings and Senator Sanders sent a joint letter to the HHS Office of Inspector General (“OIG”) requesting that Office to examine the effect of generic drug price increases on Medicaid and Medicare, and to evaluate the potential savings if the MDRP price increase penalty were to apply to generic as well as brand drugs.  The letter noted that, between July 2, 2013 and June 30, 2014, the price of half of all generic drugs increased and prices of approximately 10% of such drugs doubled in price during that period.  In April, the OIG agreed to conduct such a study, but no report has yet been issued.

Without waiting for the results of the OIG study, Congress has enacted Section 602 of the BBA, requiring manufacturers of noninnovator multiple source drugs (which we will call “generics” here for convenience) to pay an additional rebate under the MDRP, similar to that paid for innovator drugs.  The additional rebate for generics will apply to rebate periods beginning with the first quarter of 2017.  The additional rebate due for generics, as for innovator drugs, is equal to the AMP for the current quarter minus the baseline AMP adjusted for inflation.  The inflation adjustment is calculated as the Consumer Price Index for all Urban Consumers (“CPI-U”) for the month before the reporting quarter divided by the baseline CPI-U.  For generics marketed on or before April 1, 2013, the baseline AMP is the AMP for the third quarter of 2014 and the baseline CPI-U is the CPI-U for September 2014.  For Generics marketed after April 1, 2013, the baseline AMP is the AMP for the fifth full calendar quarter after the drug was first marketed and the baseline CPI-U is the CPI-U for the last month of the baseline AMP quarter. 

Dramatic price increases of both brand and generic drugs have become a front page domestic issue this year, with Congress, state legislatures, and presidential candidates proposing a variety of antidotes.  Besides price increase rebates for generics, these proposals have included permitting CMS to negotiate Medicare Part D drug prices with manufacturers, permitting importation of drugs from Canada, requiring rebates on drugs dispensed to dual eligibles under Medicare Part D, requiring manufacturers to report information on now drug prices are established, and prohibiting pay-for-delay arrangements between brand and generic manufacturers.  These ideas are not new, many of them having appeared for years in legislation and Presidential budget proposals that have not passed.  Section 602 represents the first time that one of these proposals has been enacted, and we fear it is a portent of more to come.