American Rescue Plan Act of 2021: Medicaid Rebate Inflation Penalties Will Soon Know No Bounds

A simple amendment, intended to begin on January 1, 2024, to Section 1927(c)(2)(D) of the Social Security Act (42 U.S.C. 1396r–8(c)(2)(D)), and contained in Section 9816 of this bill, may have a significant impact on many manufacturers by effectively removing the current limit on the Medicaid Rebate Amount. This means that manufacturers incurring an inflationary penalty could now see a Unit Rebate Amount (URA) greater than their Average Manufacturer Price (AMP) beginning in 2024.

A common misconception is that inflation penalties are incurred only when manufacturers dramatically increase product prices. While this certainly can be the case, manufacturers can also incur inflationary penalties in the normal course of business. For example, WAC (Wholesaler Acquisition Price) pricing can be significantly higher than what is actually being paid for a drug at the retail and patient levels. It’s not uncommon for products, especially generic drugs, with WACs of $100 or more to sell to pharmacies for $20, $15 or even $10.

Feeling pressure by wholesalers to keep WAC high (as wholesalers often receive fees based on WAC) and pressure from retailers to keep contracted prices and patient costs low, a drug manufacturer has to critically review all pricing decisions, as profitability can often be in the pennies after all fees and discounts are deducted.

These notable variances between WAC and contract pricing can result in massive variability in ordering trends. Manufacturers may have wholesalers placing large orders at WAC one month and retailers placing orders at the low contract prices the next month. These large swings can create extensive variation in an AMP calculation.

If manufacturers had the misfortune of having their baseline AMP set in a quarter where retailers made up the majority of the sales, it is not uncommon to realize inflationary penalties on the Unit Rebate Amount in quarters where the bulk of the sales go to wholesalers.

Currently, penalty limitations governed by section 1927 of the Social Security Act include provisions to limit the total Unit Rebate Amount to no greater than the calculated AMP for that quarter. This essentially protects manufacturers from paying out rebates that are greater than what the drug was sold for during that quarter. With the passing of the American Rescue Plan Act of 2021, this provision will end on December 31, 2023. This creates a pathway whereby a manufacturer may not only have to give its product away for free to Medicaid enrollees, but also be open to additional rebates that could be far and above calculated AMP values.