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Maximize Value February 11, 2016

Medicaid Update: Drug Rebate Program Gets Much-Needed Clarity

Partner, Health and Life Sciences, Oliver Wyman
Engagement Manager, Oliver Wyman
Key Takeaway
.@CMSGov final rule provides clarity & sustainability for #Medicaid Drug Rebate Program - @OliverWyman analysis

In January the Centers for Medicare & Medicaid Services (CMS) issued the Covered Outpatient Drugs (CODs) Final Rule that ends a prolonged lack of clarity related to the Medicaid Drug Rebate Program (MDRP) and pharmacy reimbursement. The Final Rule implements substantive changes to the Medicaid program in order to improve access and ensure long-term sustainability. Parie Garg and Peter Emigh, with our government programs team, provide an overview of implications for key stakeholders:

Drug costs, particularly specialty drug costs, have been rising at a dramatic pace. Medicaid’s drug rebate program was failing to secure competitive rebates and required redress. While the Affordable Care Act (ACA) laid the groundwork for this overhaul, the COD Final Rule provides the much-needed detailed guidance to ensure the sustainability of the MDRP.

Here’s a brief history:

  • In a 2013 report (Medicaid Drug Pricing in State Maximum Allowable Cost Programs), the Office of Inspector General found that reimbursement caps (Federal Upper Limit or FUL) prior to the ACA were, on average, “nearly double” state-set Maximum Allowable Costs (MACs), resulting in significant extra costs to states and CMS.
  • The ACA, passed in 2010, sought to address this issue (among many, many others) and promulgated major changes to the methodology for determining Medicaid rebates, including a definitional change to Average Manufacturers Price (AMP), a key metric underpinning the MDRP; however, it lacked adequate clarity and posed significant operational and compliance challenges.
  • As such, CMS sought to clarify with a proposed rule in February 2012 that, after a very protracted review period, resulted in the Final Rule in January 2016.

The Final Rule accomplishes a lot; namely, it provides a regulatory definition for AMP, updates the FUL formula for the payment of multi-source generic drugs, extends rebates to CODs provided by Medicaid managed care organization plans (MMCOs), revises the definition of “states” to include the U.S. territories, and clarifies pharmacy reimbursement to be based upon “actual acquisition cost” (AAC) plus allowable professional dispensing fees. The Final Rule goes into effect in April 2016, except for the inclusion of U.S. territories, which is delayed until 2017.

With such a broad scope, a variety of stakeholders are impacted in a significant way. Generally speaking, payers – namely CMS, the states, and MMCOs – come out ahead with an expansion of the MDRP and a revised approach to calculating reimbursement caps delivering multi-billion dollar cost savings. Pharmacies are both negatively and positively impacted: AAC-based reimbursement will likely reduce revenues while reimbursements for pharmacist services may constitute a new revenue stream. Pharmaceutical manufacturers are, for the most part, worse off as the expansion of the MDRP is at their expense.

A closer look:  


  • Significant savings attributed to the extension of AMP as the primary metric to determine Medicaid rebates for CODs and the revised FUL calculation for certain multi-source drugs. CMS estimates the COD Final Rule will deliver ~$2.7B in Medicaid drug spend savings over the next five years, incremental to budgeted ACA savings.
  • Two AMPs established for drug rebates – a “standard” AMP and an “alternative” AMP. Which AMP applies is drug-specific and determined via a new 70/30 standard.
  • Standard AMP applies for drugs generally sold (>30%) through retail community pharmacies (RCPs).
  • Alternative AMP applies for drugs not generally distributed (<30%) through RCPs. Largely created to apply to “5i” – inhalation, infusion, instilled, implanted, or injectable – drugs. By including 5i drugs, which are not typically dispensed through the retail channel, states can collect rebates on the fastest growing area of drug spend.
  • The FUL for multi-source drugs with three or more therapeutic equivalents now capped at 175% of the weighted average monthly AMPs, using the most recently reported monthly AMPs, and eliminating single-source drugs from the FUL calculation.
  • MDRP savings extended to MMCOs, putting them on equal footing with fee-for-service Medicaid (note, differences between attribution date methodology in rebate calculations for MMCO and FFS may require further revisiting if discrepancies are significant).


  • Impact will be state-specific and determined by whether states, required to assess and reimburse for pharmacist services, raise dispensing fees to compensate for lower AAC-based reimbursements.

Pharmaceutical manufacturers

  • Will see rebate costs increase due to MDRP expansion and a revised FUL formula. “Line extension” drugs are also likely to require a larger rebate (as per ACA), but this was not included in the COD Final rule. Additionally, compliance costs will increase as manufacturers will be required to report monthly on individual drug distribution data (to determine standard vs. alternative AMP). The only silver lining for manufacturers is that the rule removes ambiguity and compliance risk by providing regulatory guidance as to the proper calculation and reporting of drug product and pricing information for the MDRP.

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