Proposed Medicaid Regulation Would Present Obstacles in Race for a COVID-19 Cure


A recently proposed regulation from the Centers for Medicare and Medicaid Services (CMS) would make changes to the Medicaid Drug Rebate Program (MDRP) that could unwittingly hamper the worldwide race for COVID-19 treatments and cures. The regulation would significantly expand the definition of “line extension” and thereby punish improvements made to existing pharmaceutical products, rather than rewarding them. It could also penalize manufacturers that find new uses for existing drugs, such as discoveries that an already-approved drug could be effective in treating or curing coronavirus.

To understand the negative impacts this proposed regulation could have on Medicaid patients and, potentially, on the fight against COVID-19, it first helps to review how the MDRP works.

Medicaid and the Medicaid Drug Rebate Program (MDRP)

Medicaid is a health coverage program jointly funded by state and federal governments but largely administered by the states. Eligibility was historically limited to low-income families, pregnant women, infants, children, and individuals with disabilities, but the Affordable Care Act (ACA) expanded Medicaid eligibility to adults at or below 133 percent of the federal poverty line (in 2020, the federal poverty line was $12,760 for an individual). After the Supreme Court ruled the federal government could not require states to expand Medicaid, it became optional for states to do so. As of 2020, 36 states and Washington, D.C. have expanded Medicaid and 14 states have not (Oklahoma is required to expand Medicaid by July 1, 2021 after voters passed Medicaid expansion in a June 2020 ballot initiative). As of March 2020, nearly 71 million Americans were enrolled in either Medicaid or the Children’s Health Insurance Program (CHIP)—that’s more than one in five Americans.

Medicaid pays for prescription drugs in a much different manner than other government health programs. While Medicare Part D leaves drug price negotiations to private plan sponsors and manufacturers, and Medicare Part B typically pays for drugs “based on the [drug’s] average sales price plus 6 percent (ASP + 6 percent),” Medicaid requires drug manufacturers to significantly discount the price of their drugs under the Medicaid Drug Rebate Program.

Generic drug manufacturers pay a 13 percent rebate on the average manufacturer price (AMP) per unit of the drug. Most brand-name drugs pay a 23.1 percent rebate per unit, and then an additional rebate based on how much the manufacturer raises the price of their drug above inflation (measured by the Consumer Price Index for All Urban Consumers, or CPI-U). The ACA required manufacturers to pay an additional rebate for new formulations of an existing brand name drug, which are called line extensions. According to the statute, these new formulations could include an extended release version of a drug.

Overall rebates on brand drugs are limited to 100 percent of the drug’s AMP; in other words, manufacturers cannot pay more in rebates than the actual price of the drug. Some policymakers want to do away with this limit, and either eliminate the cap or raise it to 125 percent of AMP.

Impacts of the MDRP

The Medicaid Drug Rebate Program has led to substantial transfers from manufacturers to government coffers, currently totaling tens of billions of dollars per year. According to the Medicaid and CHIP Payment and Access Commission (MACPAC):

“In fiscal year (FY) 2017, Medicaid spent approximately $64.0 billion on outpatient prescription drugs and collected $34.9 billion in rebates, bringing net drug spending to $29.1 billion (Table 1). Net spending for outpatient drugs accounted for about 5.1 percent of total Medicaid benefit spending.”

Rebates, therefore, accounted for well over half of the total amount of gross drug spending in Medicaid in FY 2017. This is also clearly reflected in the proportion of total Medicaid spending on outpatient drugs, which is about half (5.1 percent) the proportion of total U.S. national health expenditures on retail prescription drugs (nine percent).

The extremely generous rebates that Medicaid forces manufacturers to pay state governments actually led to a decline in net drug spending in the Medicaid program from FY 2016 to FY 2017. Even though gross drug spending increased five percent ($3.1 billion), net drug spending actually declined two percent (-$0.6 billion).

At first glance, these results sound positive. However, there are several reasons to be skeptical about the MDRP and its role in the effort to reduce prescription drug costs for all American patients and providers:

  • When combined with the deeply flawed 340B program, manufacturers regularly have to provide their pharmaceutical products to all 50 state Medicaid programs, and to tens of thousands of health care providers, at a steep discount compared to the price at which they sell their products to wholesalers and pharmacists. Though there is a prohibition on state agencies or providers ‘double dipping’ in the MDRP and the 340B program, a recent Government Accountability Office (GAO) report found that a lack of CMS oversight may increase the risk that double dipping occurs.
  • Manufacturers cannot simply be forced into a deep discount on their products in Medicaid without any adverse effects on non-Medicaid patients. As the American Action Forum’s Tara O’Neill Hayes points out here, market-distorting discounts in Medicaid could lead to higher launch prices for new drugs (as manufacturers seek to counteract the effect of discounts that reduce the value of their drugs by 50 percent or more) and to less negotiation over drug prices in the private market (since manufacturers have less of an incentive to give a lower “best price” to one private payer, given they will need to match that “best price” in Medicaid).
  • All but three states negotiate supplemental rebates with manufacturers, in exchange for better placement of a manufacturer’s drug on the state’s Medicaid formulary. Though these negotiations happen in Medicare Part D and in the private insurance market, the supplemental rebates in Medicaid just increase the gap between a drug’s true cost and its Medicaid price, pushing manufacturer costs to other parts of the market and/or adversely impacting the development of new drugs.
  • Perhaps most importantly, the rebates don’t impact Medicaid patients at the point of sale. They go straight to state Medicaid agencies, who then share the rebates with the federal government. Patient cost-sharing for Medicaid prescription drugs is extremely low, with most co-payments coming out to around $3 or $4 per brand drug prescription (and less for generic drug prescriptions). Several states, like Florida, New Jersey, Texas, and Washington, require no cost-sharing whatsoever for prescription drugs. This makes sense, in large part, because most Medicaid patients are at, near, or below the federal poverty line. The broader point for the MDRP, though, is that each additional dollar of rebates benefits federal and state governments, not Medicaid patients. While rebates might help lower overall Medicaid costs, a direct connection between MDRP and out-of-pocket costs for beneficiaries is tenuous, at best. 

The Problems With CMS’ New Proposed Regulation on Line Extensions

Expanding the Regulatory State

As mentioned above, the Centers for Medicare and Medicaid Services has a new proposed regulation that would punish improvements made to existing pharmaceutical products, rather than rewarding them. It would do so by greatly expanding the definition of a “line extension” for a brand drug.

As a reminder, line extensions are new formulations of a drug that trigger an additional rebate for manufacturers under the MDRP. The statutory definition of a line extension, created by the ACA and modified by subsequent laws, is quite short. It reads:

In this subparagraph, the term ‘line extension’ means, with respect to a drug, a new formulation of the drug, such as an extended release formulation, but does not include an abuse-deterrent formulation of the drug (as determined by the Secretary), regardless of whether such abuse-deterrent formulation is an extended release formulation.

In the proposed regulation, CMS effectively argues that the lack of specificity in the statutory definition gives the agency significant flexibility to expand the definition through regulations:

Based on the definition of line extension that was included in the Affordable Care Act, we believe that the statute gives us discretion and authority to interpret the term line extension broadly.

Nowhere in the statute do lawmakers ask CMS to interpret the definition through regulations, though, and nowhere do they ask CMS to interpret the definition broadly. This approach also runs contrary to the Trump Administration’s stated preference for deregulation and broader regulatory reform.

Dive deeper into the proposed regulation and CMS’ changes become even more problematic. CMS would like to expand the definition of “new formulation” in nine specific ways:

  • Extended release formulations;
  • Changes in dosage form;
  • Changes in strength;
  • Changes in route of administration;
  • Changes in ingredients;
  • Changes in pharmacodynamics (“the study of a drug's molecular, biochemical and physiologic effects or actions”);
  • Changes in pharmacokinetics (“the study of drug absorption, distribution, metabolism, and excretion”);
  • Changes in indication (i.e., particular conditions, symptoms, or diseases a drug treats) “accompanied by marketing as a separately identifiable drug”;
  • Combination drugs, “such as a drug that is a combination of two or more drugs or a drug that is a combination of a drug and a device.”

Of note, only one of the above nine changes (“extended release”) is mentioned in the ACA. The other eight are, effectively, proposed additions by CMS. Many of the above represent improvements to a drug for the patients taking them and/or the providers administering them. For example, a change in the route of administration could involve an injectable drug becoming a tablet instead. A change in strength could mean a patient has to take a particular drug less often, say once a day instead of twice a day. The proposed regulation from CMS would punish these innovations by making manufacturers pay higher rebates for these drugs.

Impacting the Fight for COVID-19 Treatments

Particularly problematic during the COVID-19 pandemic is the CMS proposal adding “changes in indications” to the definition of “new formulation.” CMS noted critiques of this proposed definition when the agency first suggested it in 2012 (emphasis ours):

We received several comments stating that the proposal was not feasible because the approval of a new indication for an already approved drug may not result in a different drug product and it would not be logical that a drug is a line extension of itself.

To address these critiques, CMS suggests only applying the additional rebate if “the manufacturer markets the drug in such a way that it is a separately identifiable drug product.” This essentially says that if a manufacturer finds that an existing drug can apply to a new condition or disease, it can avoid the additional rebate only if it doesn’t market this drug’s new indication to patients and providers.

This is, at face value, an absurd limitation. As hundreds of pharmaceutical manufacturers around the world race to develop both treatments for COVID-19 and a vaccine, dozens of drugmakers are turning to repurposed drugs that have been approved for other diseases or conditions. As Fierce Pharma reported in May:

As April waned, Amgen announced it would take PDE4-inhibitor Otezla, which it picked up from Celgene last year, into a clinical trial soon to study its effectiveness in preventing respiratory distress from COVID-19.

Meanwhile, Novartis plans to evaluate IL-1beta blocker Ilaris to treat cytokine storm, a severe overimmune reaction that can be fatal. Investigators will primarily focus on whether Ilaris can keep patients off ventilators. Top-line results are expected late summer.

...Meanwhile, the Swiss drugmaker and its partner Incyte have commenced a study for JAK inhibitor Jakafi to treat cytokine storm. The blinded, double-arm study will test Jakafi alongside standard-of-care therapy in COVID-19 patients with pneumonia.

The Fierce Pharma report, last updated in early May, listed over 30 repurposed drugs being used in COVID-19 clinical trials., run by the National Institutes of Health (NIH), is tracking thousands of active COVID-19 clinical trials and studies, including hundreds that involve the use of an existing drug. The proposed CMS regulation would theoretically punish all of these drugs with a higher rebate in the MDRP. This would increase the costs for manufacturers to take the risk of attempting to repurpose existing drugs to fight COVID-19, and could, over time, reduce the number of clinical trials manufacturers are willing to undertake with repurposed drugs. The result could be lower chances and a longer wait for COVID-19 treatments and cures.

Pushing Drug Costs on Patients and Taxpayers

Additional rebates in the Medicaid program will fill the coffers of state Medicaid agencies and the federal government, but the vast majority of Americans covered by private insurance or Medicare may be the ones who ultimately pay the bill. NTU has noted before that whenever the federal government tries to force private actors into providing goods or services for less than they are worth, the government ends up pushing those costs onto other parts of society. This will either significantly impact research and development or force higher health care costs onto the tens of millions of Americans covered by private insurance. The proposal could also lead to higher costs for the tens of millions of taxpayers supporting federal health care programs like Medicare and the Affordable Care Act (ACA) exchanges, since rising drug costs in these programs translate to higher federal subsidies.


The proposed CMS regulation would be an extraordinary and expansive use of regulatory power at any time, but it is particularly counterproductive during an unprecedented pandemic. Medicaid continues to collect extraordinarily large rebates through the MDRP, and this proposed regulation would primarily do two things: 1) squeeze the cost bubble to other parts of the American health care system, such as Medicare and private insurance, and 2) reduce the incentives for manufacturers to invest in research on new uses for and improvements to their existing drugs. The latter effect could have a particularly acute impact on the fight for COVID-19 treatments, meaning the proposed CMS regulation could not come at a worse time. CMS must make serious, significant modifications of this rule to address the problems outlined here and contemplate further steps, if its original intent of “supporting value-based purchasing of drugs in Medicaid” is to be realized.