The Best Price Requirement of the Medicaid Rebate Program

AMCP believes that to provide the greatest value to Americans who need prescription drugs, market forces must effectively ensure that manufacturers of similar drugs compete with one another to establish reasonable pricing levels and maintain consumer access to needed therapies. While government has a responsibility to protect consumers against anti-competitive activity, the government must not establish rules that have the unintended effect of undermining competition.  

The best price provisions of the Medicaid Drug Rebate Program (MDRP)¹ ensure the Medicaid program receives the lowest price, with a few exceptions such as the health program for veterans. This law requires brand and generic drug manufacturers to provide the Medicaid fee-for-service program with the lowest price they offer in the rest of the drug marketplace. Prior to the law’s enactment in 1990, health maintenance organizations (HMOs), hospital systems, and other well‐organized purchasers had been able to negotiate deep discounts — often greater than 50%. In the immediate wake of the law’s passage, rather than extending these deep discounts to Medicaid, drug manufacturers instead terminated discount contracts to HMOs and hospitals. Manufacturers became disinclined to offer purchasers discounts and incentives that would then apply to a nationwide market such as Medicaid, which represented a much larger share of the total market than any single HMO or hospital system.  

Public hospitals and the Department of Veterans’ Affairs (VA) suffered the same fate, experiencing major increases in drug costs.⁴ As a result, in 1992 and 1993, Congress exempted discounts negotiated by the public hospitals and VA from the calculation of best price.  Unsurprisingly, discounts again flowed freely to those organizations.  As enrollment in Medicaid managed care organizations grew, the savings to state Medicaid programs declined.  With the passage of the Patient Protection and Affordable Care Act (ACA) in 2009, the MDRP was extended to Medicaid managed care organizations.  This change — coupled with required increases to the minimum rebate amounts for both brand and generic drugs, inflation penalties, and statutory rebates under the Medicare Coverage Gap Discount Program — has increased manufacturers’ rebate liabilities substantially in the last decade.  The Inflation Reduction Act⁵ replaces the Medicare Coverage Gap Discount with the Manufacturer Discount Program beginning in 2025 and will further increase manufacturer liabilities. The new Manufacturer Discount Program will require manufacturer discounts for applicable drugs both in the initial coverage phase and in the catastrophic phase. As a result, other private purchasers continue to labor under the effect of the best price rule. This has inflated drug costs for employers, state and federal employees, health benefits programs, privately insured patients, and health care providers ever since. 

This pernicious market effect has been well documented by the U.S. Government Accountability Office (GAO), the Congressional Budget Office (CBO), and academic economists. Fortunately, there are solutions to this problem:  

• Congress could replace the best price formula with a flat percentage rebate that generates the same level of savings for the Medicaid program that it has experienced for the past 30 years.  
• Congress could modify language to make value-based purchasing arrangements easier and mainstay for high-cost drugs.   
• Congress could repeal the best price provision and allow market forces to determine pricing.  

We believe that re-energizing the competitive forces in the pharmaceutical market will benefit not only private employers, public employers, and other purchasers of prescription drugs, but it will also improve the ability of Medicare Part D plans to negotiate for lower prices on behalf of Medicare beneficiaries. Because prices negotiated for Medicare Part D are not considered under the best price program, Part D plan sponsors are required to negotiate separately for their Medicare and non‐Medicare patient populations in order to protect the “integrity” of the best price system. It would save Medicare significant drug costs if these organizations are permitted to negotiate on behalf of their entire consolidated patient population, unencumbered by the best price rule.  

After nearly three decades of market dysfunction, and after the establishment of a Medicare drug benefit and the Marketplace Exchange program, it is time to ask whether an alternative approach to drug rebates could provide Medicaid with the same (or better) economic benefit, while freeing up competitive forces that could lower drug costs both in the private market and in public programs. AMCP strongly encourages additional reforms to the MDRP to correct the impact it has had on drug market dynamics. 

See also:

• AMCP position statement on the Competitive Marketplace 

• AMCP Legislative and Regulatory Positions

Revised by the AMCP Board of Directors, October 2023

Revised by the AMCP Board of Directors, October 2021 

Approved by the AMCP Board of Directors, June 2009 

¹ Established by the Omnibus Budget Reconciliation Act of 1990 (OBRA ’90) (P.L. 101‐508). Amended by the Patient Protection and Affordable Care Act, 42 U.S.C. § 18001 et seq. (2010) 

² GAO, Drug Prices: Effects of Opening Federal Supply Schedule for Pharmaceuticals Are Uncertain (GAO/HEHS‐97‐60. June 1997), available online at https://www.gao.gov/products/hehs-97-60.  

³CBO, How the Medicaid Rebate on Prescription Drugs Affects Pricing in the Pharmaceutical Industry, (January 1996) available online at http://www.cbo.gov/ftpdocs/47xx/doc4750/1996Doc20.pdf.  

⁴ GAO, Medicaid: Changes in Drug Prices Paid by VA and DOD Since Enactment of Rebate Provisions (GAO/HRD ‐ 91‐139, Sept. 18, 1991), available online at http://archive.gao.gov/t2pbat7/144939.pdf.  

5 Inflation Reduction Act of 2022, H.R 5376, available online at https://www.congress.gov/bill/117th-congress/house-bill/5376/text