Federal Officials Confirm A Shift In Medicaid Drug Rebates

The federal agency that oversees Medicaid confirmed Thursday that some money states receive as rebates from drugmakers will now be redirected to the federal government to help pay for the new health overhaul.

However, federal officials said that states’ losses would be offset by other changes in Medicaid, the federal-state health care program for low-income people.

The health law increases the rebates that drugmakers must offer state Medicaid programs from 15.1 percent to 23.1 percent for most brand name drugs, and by smaller amounts for other drugs and generics. In the past, states and Washington shared those savings. But under the new law, Washington will keep all rebates within that 8-percentage-point range.

State officials told Kaiser Health News earlier this week that they have already negotiated many drug discounts that exceed 15.1 percent so they will lose that money under the new federal rules. Some said millions of dollars could be on the line for individual states, but federal officials said they have not estimated the cost to states.

State officials had hoped the federal government would interpret the law in a way that left their discounts untouched. But in a letter Thursday
to state Medicaid officials, the federal Centers for Medicare and Medicaid Services explained, “The amount of the savings resulting from the increases in the rebate percentages … will be remitted to the Federal government.”

Cindy Mann, the agency’s director for the Center for Medicaid and State Operations , confirmed in an interview that meant states that already received drugmaker rebates between 15.1 and 23.1 percent would no longer be able to keep that portion of their savings. States and the federal government would continue to share in savings for the portion of the rebates both below and above that range. Many states already have average rebates well above 23 percent.

Mann suggested that state officials could negotiate deeper discounts with drugmakers to try to “recapture that dollar.”

Mann also pointed to a related provision in the health law that will for the first time require discounts from drugmakers for medicines purchased as part of Medicaid managed care plans. Those discounts would be shared between the states and the federal government.

“They would be gaining on the managed care side,” she said. Overall, the health law “gives everyone an opportunity to capture significant rebate dollars.” 
 

Mann said some concerns about dramatic losses of state Medicaid financing were overblown, taking issue in particular with a memo
circulated by a top Indiana health official. The memo said the state could lose $400 million over 10 years because of changes to the drug rebate program. 

That estimate assumed the federal government would keep the savings from the new discounts in managed care plans, but Mann said her agency had decided that would be shared with states.

Marcus Barlow, a spokesman for the Indiana Family and Social Services Administration, said the agency still believes its estimate is accurate. 
 

California officials said earlier this week that their preliminary estimate was a loss of $50 million a year, even after accounting for new savings through their managed care programs.  

The rebate provisions would raise an estimated $38 billion for the federal government, according to the Congressional Budget Office. 
 

But the impact on states is less clear. Kaiser Health News reported  Tuesday that states already average nearly 40 percent rebates compared with their total drug spending, and that all but three states get average discounts far higher than the 15.1 percent previously required by the federal government.

Larry Reed, the federal agency’s pharmacy director, said it would be hard to estimate loss for states because each state negotiates rebates on a drug-by-drug basis and the federal government doesn’t have access to that data. 
 

It also remains unclear how much the states will gain in new discounts from the changes that affect managed care. Though 70 percent of Medicaid enrollees receive benefits through managed care plans, only 25 states use these plans to administer drug benefits. An additional nine states allow managed care firms to administer only partial drug benefits.

That is because many states opt instead to buy the drugs themselves to get the rebates. Now, they will have equal access to rebates whether they use a traditional Medicaid program or managed care, which generally achieves more drug savings for states.