Policy & Regulation News

How Effective is the Medicaid Drug Rebate Program?

By Stephanie Reardon

Rebate program saved Medicaid an average of $15 billion annually.

- The Affordable Care Act (ACA) will soon be reducing Medicaid reimbursement. A recent survey was conducted by the Office of Inspector General (OIG) to test the effectiveness of the implementation of the Medicaid drug rebate program.

The purpose of the Medicaid drug rebate program is to reduce Medicaid expenditures for prescription drugs. The Centers for Medicare & Medicaid Services (CMS) works with drug manufacturers to offset the Federal and State costs of most outpatient prescription drugs dispensed to Medicaid patients.

In order for a state to cover most of a manufactuer’s drugs under Medicaid, the program requires a drug manufacturer to enter into a national rebate agreement with the Secretary of the Department of Health and Human Services (HHS).

Manufacturers are then responsible for paying a rebate on those drugs for which payment was made under the state plan. These rebates are paid by drug manufacturers on a quarterly basis to states and are shared between the states and the Federal government to offset the overall cost of prescription drugs under the Medicaid Program.

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  • The result of OIG’s study showed that almost all states used offset rebates and supplemental rebates to reduce Medicaid expenses on prescription drugs. Out of 50states and District of Columbia, 48 reported collecting $2 billion in ACA rebates and 44 states reported collecting $1.7 billion in Medicaid rebates. Between 2010 and 2012, the rebate program saved Medicaid an average of about $15 billion annually.

    The study also found three problems that OIG believes should be reviewed.

    1. Not all states report offset rebates
    2. Not all states collect supplemental rebates
    3. States methods for calculating supplemental rebates may result in lower supplemental rebate amounts

    In order to amend these problems, OIG suggested that CMS ensure that all states report offset rebate amounts, consider encouraging all states to establish supplemental rebate programs and encourage states to explore alternate methods for calculating supplemental rebates.

    The ACA will soon require CMS to reduce payments to the states. However, if CMS wants to ensure it receives the benefits of all eligible rebates, then states must be able to report the offset rebates. CMS could work with each state to help assure that it is capable of reporting these rebates.

    Currently, the calculation method that all but three out of the 44 states that collect supplemental rebates use is affected by the federal rebate increase. Under most States’ rebate agreements, supplemental rebates are inverse to Federal rebate amounts therefore, if the Federal rebate increases, the supplemental rebate decreases by an equal amount.

    CMS should encourage the states to try using a different calculation method that is not affected by the federal rebate increase.

    CMS reviewed OIG’s findings and agreed to follow through with all of OIG’s suggestions.