Average Manufacturer Price Cap Update

Overview

Recently, three pharmaceutical manufacturers announced significant pricing changes to their insulin products in response to regulatory and industry factors stemming from implementation of the American Rescue Plan Act of 2021, along with changes made to eliminate the Medicaid Rebate Cap starting January 1, 2024.

While this change will result in a price decrease for these products to members, manufacturer rebates to the health plan will also decrease, or be eliminated. However, the pricing change will also result in a similar decrease in the cost of claims to the plan.  
 

Manufacturer Drug Rebate Program

Drug manufacturers are required to pay rebates to Medicaid via the Medicaid Drug Rebate Program (MDRP) in exchange for coverage of their drugs.  Helps offset costs for Medicaid.

Affordable Care Act (ACA) of 2010

Capped the total statutory Medicaid rebate at 100% of the AMP, even if the manufacturer continues to take prices increase exceeding the rate of inflation.

American Rescue Plan Act of 2021 (ARP)

• Enacted on March 11, 2021 during COVID public health crisis.
• Aimed at mitigating the effects of the COVID-19 pandemic through new funding.
• Eliminates the rebate cap of 100 percent of the AMP starting January 1, 2024.

What Does This All Mean?

• Starting January 1, 2024, manufacturers may be required to pay rebates to the Medicaid program that exceed the list price of the drug, due to cap being removed.
• In other words, manufacturers may have certain drugs where they pay Medicaid to use the product(s).

Background

The American Rescue Plan (ARP) Act of 2021 includes a provision that eliminates the statutory cap on rebates that drug manufacturers pay to Medicaid. Beginning in January 2024, Medicaid rebates will no longer be capped at 100 percent of the quarterly average manufacturer price (AMP). The Centers for Medicare & Medicaid Services’ efforts to remove the cap, whereby potentially increasing Medicaid rebates to states, is referred to as the AMP Cap removal project.

The Medicaid Drug Rebate Program currently caps rebates for single source, innovator multiple source, and non-innovator multiple source drugs at 100% of the average manufacturer price. This means that manufacturers are not required to pay any additional rebates for these drugs, even if the price of the drugs increases over time. The ARP provision would remove the 100% cap for these drugs, beginning January 1, 2024.

What are the implications of Medicaid cap removal?

The following equation illustrates the current Medicaid Rebate calculation:

The Medicaid Drug Rebate Program establishes the amount of the rebate that drug manufacturers are required to give to states. The calculation of rebates is divided into two parts: Base Rebate, which is determined as the greater of % of the AMP per unit, or the difference between the AMP and the best price per unit. The second part, Additional Rebate, is adjusted by the Consumer Price Index-Urban (CPI-U). Since 2010, the total Medicaid rebate amount a drug manufacturer was required to pay was capped at 100 percent of the AMP. This implies that manufacturers who reach the rebate ceiling are exempt from further Medicaid rebates even if they raise list prices further. 

This example explains the impact of AMP cap removal on a Sample Single Source or Innovator Drug:
 

In this example, under the current rule, the unit rebate amount (URA) would be capped at AMP, or $35. However, once the ARP rule goes in effect, the manufacturer will now owe Medicaid an additional $8 ($43 ‐ $35) per script. This means the manufacturer will be paying more rebates to Medicaid, and in some situations, this can even go above the manufacturer selling price.

The ARP rule will have major impact on the brand drugs whose rebates are already capped at AMP or drugs with a high list price and generate a large rebate.

How does AMP Cap affect Client Pricing?

Since the removal of the cap on Medicaid rebates will have a significant impact on drug pricing and rebates, it is considered a “market event.” As such, our PBM has notified us that there will be a reduction in the rebates collected from manufacturers affecting our rebate guarantees. In turn, we will need to adjust our rebate guarantees with our ASO clients. While groups will see lower rebate payments with this pricing change, they will also benefit from lower claim costs due to the decrease in list prices of the affected drug products. Our next activity with this pricing change is to determine the rebate guarantee adjustment that will need to be made for each ASO group.