Medicaid could receive larger rebates from drugmakers beginning in 2024 under legislation signed Thursday by President Joe Biden — so large that some pharmaceutical companies could essentially end up paying states to use their drugs.
The provision is tucked into the massive $1.9 trillion pandemic relief package and eliminates what's known as the Medicaid "penny rule." The obscure law has limited the mandatory rebates drugmakers pay to Medicaid to 100% of the average manufacturer price, or what wholesalers are charged after initial discounts. In the event required rebates total up to the average manufacturer price or higher, the price per unit is set to $0.01.
Due to the way Medicaid rebates are calculated, removing the cap would penalize companies that have taken large price hikes on their products. Drugmakers are required to give Medicaid both the best price they offer to commercial insurers, as well as an additional cut for those drugs with prices rising faster than the broad economic inflation rate.
Elimination of the penny rule provision was included in a drug pricing bill passed by the Senate Finance Committee in 2019 but never taken up by the full Senate. At the time, the Congressional Budget Office estimated repealing the rebate cap would save the federal government $84 million in the first year and $14 billion over the eight years to 2030.
Medicaid accounts for a small portion of total U.S. drug spending — about $31 billion of the total $370 billion spent, according to federal government estimates. However, removing the penny rule could have an outsized effect on drugs more heavily used by Medicaid enrollees.
It's difficult to determine which drugs might be most affected by the rule in three years, in large part because rebates are a closely held secret among pharma companies. Drug spending data from Medicaid, however, gives some hints of potential targets. The federal database records reimbursable amounts before rebates are paid, detailing which drugs cost state Medicaid programs the most, as well as which are most costly on a dose or claim basis.
In 2019, the latest year with data available, Medicaid programs spent the most — some $1.3 billion — on Latuda, a drug for bipolar depression made by Japan's Sumitomo Dainippon. But Latuda had a relatively low price inflation rate at 1.3% and could face generic competition in 2023, so it probably will not be affected by the penny rule's elimination.
Likewise, although the original formulation of AbbVie's blockbuster anti-inflammatory drug Humira cost Medicaid $862 million 2019, with a price growth rate of 12%, its looming patent expiration in 2023 could mean it's not affected either.
A number of others with longer patent exclusivity and billing hundreds of millions of dollars a year to Medicaid, however, had double-digit price increases in 2019 — a clue to which drugs could be under pressure in three years.
Big-ticket Medicaid drugs with long patent lives and large price increases in 2019
|Product||Company||Medicaid pre-rebate spending, in millions||Average per dose price increase, 2018-2019|
|Eliquis||Bristol Myers Squibb/Pfizer||$373||10%|
|Xarelto||Johnson & Johnson/Bayer||$349||11%|
Source: Centers for Medicare and Medicaid Services
Of the 10 listed above, Trulicity has a key patent expiration in 2024, meaning it might not be affected much by the rebate rule.
Some newer drugs with quickly growing sales could enter this top 10 by 2024, based on sales projections. Sanofi and Regeneron's eczema and asthma drug Dupixent, AbbVie and Johnson & Johnson's lymphoma treatment Imbruvica and AstraZeneca's cancer therapy Tagrisso — all expected to be in the top 10 highest selling drugs by 2026, according to EvaluatePharma forecasts — also had double-digit price increases in 2019.
Fast-growing drugs with big Medicaid price increases in 2019
|Product||Company||Medicaid pre-rebate spending 2019, in millions||Average per dose price increase, 2018-2019|
|Imbruvica||AbbVie/Johnson & Johnson||$111||26%|
Source: Centers for Medicare and Medicaid Services, EvaluatePharma
Ronny Gal, an analyst at Bernstein Research, predicted in a recent client note that other drugs, such as Eli Lilly's insulin Humalog and Jazz Pharmaceuticals' narcolepsy treatment Xyrem, are likely to be heavily affected among the eight pharma companies he covers.
The 2024 date in the bill Biden signed — changed from 2023 date proposed in the Senate Finance Committee's drug pricing bill — means that drug industry lobbyists will have three years to get the rule reinstated before its withdrawal takes effect.
PhRMA, the most powerful industry group, criticized the drug-price related measures in the legislation Biden signed into law, while supporting the overall package.
"Unfortunately, the legislation also includes changes to drug pricing policies that have nothing to do with lowering costs for patients," PhRMA head Stephen Ubl said in statement. "Our industry is willing to come to the table and help advance reforms that will ensure medicines are affordable, but piecemeal changes that fail to address the systemic challenges facing patients is the wrong approach."