Could the Feds Save States Money on Prescription Drugs?

A proposal by the Biden administration could reduce how much states are spending on high-cost drugs for their Medicaid patients by billions of dollars over the next decade. 

President Joe Biden in his 2024 budget request to Congress earlier this month proposed letting the federal government negotiate rebates from drug companies on behalf of states. According to experts, the feds would have more leverage to get bigger discounts from drug companies. 

However, the idea is running into opposition from some Republican lawmakers who see it as a “power grab,” honing in on a role that has traditionally been left to states.

Currently, states and the federal government, which share the cost of paying for Medicaid, receive billions in rebates from drug companies. Drug manufacturers are required to give them about a 25% discount in return for a drug to be covered for the more than 91 million low-income people in the health care program.

In addition, states or pools of states can push for even more rebates by threatening to exclude a drug from preferred lists of medications covered by Medicaid, unless companies give them an even higher discount. Drugs not on the list have higher copays and oftentimes have to get special approval to be covered for a patient. 

“You can see why a manufacturer might be willing to give an additional rebate,” said Edwin Park, ​​a research professor at Georgetown University’s McCourt School of Public Policy. “If they know the drug is on a preferred list, and people don't have to go through a prior authorization process, it's more likely they're going to get that drug, which means bigger sales for that manufacturer.”

All states, except for Hawaii, New Mexico, New Jersey and South Dakota, negotiate for supplemental rebates, said Edmund Haislmaier, a senior research fellow for the conservative Heritage Foundation’s Center for Health and Welfare Policy. 

Biden’s budget proposes allowing the Centers for Medicare and Medicaid Services (CMS) to negotiate supplemental rebates on behalf of states for “high-cost drugs.”  

Jack Rollins, director of federal policy for the National Association of Medicaid Directors, noted that it’s harder for states to negotiate for rebates for higher-priced drugs. 

“Often these kinds of drugs are the only treatment in their category, meaning there’s no competitor product to use as a negotiating tool in a supplemental rebate negotiation,” he said.

The CMS did not return requests for an interview. But Rollins said letting the agency negotiate supplemental rebates for states could increase the discounts. CMS “would likely have more negotiating power than an individual state or compact of states could have.”

The Office of Management and Budget estimated that the proposal could reduce the federal government’s share of paying for the drugs by $5.3 billion over the next decade, Park wrote in a recent blog post about the proposal. He estimated that the savings for states could be around $2.7 billion.

But how much Biden’s proposal would save depends on several factors, most notably how many states actually participate. 

Bigger states might want to continue negotiating on their own because they feel like they already have leverage. The idea could help smaller states, but to achieve more savings, Park said, larger states would need to join.

Another factor is drug manufacturers' willingness to negotiate. Drug companies, Park said, “may be willing to go along because they won't have to negotiate with individual large states. They can negotiate with the [single] federal pool.”

The federal government may still not have much leverage in negotiating down prices for “breakthrough drugs” that have no competitors, Park said. “The best case scenario is you have a drug that's high cost and there are two or three manufacturers all competing for that same space. Then you can say, ‘Hey, Manufacturer A, if you give me a bigger discount than Manufacturer B, I'll put you on the preferred drug list. Manufacturer B, I won't.’”

A spokesman for the Republican-led House Energy and Commerce Committee, which handles health care policy, did not respond to repeated requests for comment. But Rep. Buddy Carter, a Republican on the committee, said he was still studying the proposal.

After owning a pharmacy in Georgia for 32 years, “I understand how volume discounts work,” he said. “And certainly, the federal government would have a greater volume if they represented more states. However, anytime you get the federal government involved, oftentimes, it turns out not to be the case.”

Carr suggested that instead of surrendering control to the federal government, a better way for states to reduce their drug costs was to follow Ohio’s lead and reduce the amount pharmacy benefit managers can charge insurers like Medicaid. The companies, which serve as middlemen between pharmacies and insurers, are accused of driving up costs by charging excessive amounts.

Ohio adopted reforms in 2021 in which one pharmacy benefit manager handles drug transactions for the state’s Medicaid system and is limited in how much they can charge.

“That's where the states can save money,” Carter said.