As of late, we have all been bombarded by headlines lamenting or explaining the recent high inflation rates as we consume our daily news. The default reaction to rising inflation is typically in relation to rising costs on gasoline, groceries, and other consumer staples. The last thing on your mind when you hear of inflation is Medicaid. While high inflation may hurt your wallet at the gas pump, it could help your bottom line when it comes to Medicaid rebates.
Most pharmaceutical manufacturers participating in the Medicaid Drug Rebate Program (MDRP) have been faced with the dreaded inflationary penalty at some point. The inflationary penalty is an extra rebate that manufacturers pay on top of the base Medicaid rebate amount if price increases have outpaced inflation. Depending on the pricing spread, this could be an extra one or two percentage points or be as severe as being forced to sell your drug for a penny. Inflationary penalties are centered around one of the most important components of any drug in the Medicaid program — the Baseline AMP. Once the Baseline AMP is established, all future quarterly AMP calculations are compared against the Baseline AMP and corresponding Consumer Price Index Value to determine if your AMP is increasing faster than the CPI or rate of inflation. If it is, you will end up owing a penalty in the form of an additional Medicaid rebate (find more information on this topic here: Understanding Baseline AMP Rules Can Help You Avoid Pricing Decision Disasters).
Over the past 10 years there has not been a lot of wiggle room when it comes to increases in AMP values given the low rate of inflation. To be exact, the CPI for the ten-year period of 2011 through 2020 averaged just 1.7%. This comes at a stark contrast to the average over the prior six months of 5.7% and the most recent 6.8% CPI for the month of November 2021. This means that prior to 2021, if the AMP value of a drug increased at a rate greater than 1.7% annually, you were likely paying an additional rebate to Medicaid in the form of an inflationary penalty.
As you can see in the chart above the rate of inflation has surged in recent months, and it could actually be a bit of a benefit to manufacturers who participate in Medicaid. For example, if you’re a drug manufacturer previously hit with a large inflationary penalty, you are likely to see some relief in that additional rebate amount you have been paying to various Medicaid programs — that means less cash leaving your account on a quarterly basis and a direct benefit to your bottom line. While the inflationary penalty may not completely disappear all in one quarter, the rate at which it decreases each quarter will be far greater than the relief experienced over the prior 10 years. This is particularly timely for manufacturers that have seen raw material, labor, shipping and other associated costs of doing business increase by far more than they have been able to increase their market price without incurring these penalties.
With regard to material costs, manufacturers may be contemplating pricing increases due to API inflation pressure. Until recently, if your AMP value increased at a rate any higher than roughly a 1.7% annual rate, you’d be paying an additional rebate amount to Medicaid. With inflation currently hovering around 6-7%, manufacturers now have more room to adjust pricing as necessary, while still being able to avoid inflationary penalties that just last year would have had a major impact on Medicaid Rebate liability.
It is always important to model out potential pricing increases to determine ahead of time any risk of an inflationary penalty. Once an increase is taken, it can take years for inflationary penalties to subside. Carefully modeling price changes can help you avoid big surprises that could have a devastating financial impact on drugs with significant Medicaid and PHS/340b utilization.