Generic Drug Price Increases: Implications for Medicaid

By Rachel Sachs

The internet (not just the health policy part of the internet!) is fascinated by today’s New York Times story about dramatic recent increases in the costs of many decades-old drugs.  The story focuses on the case of Daraprim, the standard of care for treating the parasitic infection toxoplasmosis.  Daraprim was recently acquired by a start-up, which then raised the drug’s price from $13.50 a pill to $750 a pill.  Daraprim has been around for decades, and as the story notes, it’s just one of many recent examples of dramatic price increases for generic drugs, often after their acquisition by other companies (as in this case).

The article raises an enormous number of issues of interest to intellectual property and health policy scholars, both explicitly and implicitly, and other commentators have begun to canvass them.  But I want to spend the rest of this blog post unpacking a single point made in the article, because it actually contains an enormous amount of complexity.  As the author notes, “[the company’s] price increase could bring sales to tens or even hundreds of millions of dollars a year if use remains constant. Medicaid and certain hospitals will be able to get the drug inexpensively under federal rules for discounts and rebates. But private insurers, Medicare and hospitalized patients would have to pay an amount closer to the list price.”

The author is right that there’s one sense in which Medicaid and entities eligible for the 340B program (I assume this is what the author is referring to when he says “certain hospitals”) will be able to obtain this drug “inexpensively” – but there’s another sense in which they won’t be able to.

To oversimplify slightly, first, the Medicaid program is entitled by statute to receive large discounts off of the average manufacturer price of any particular drug – and if another entity receives a price below Medicaid’s net price, Medicaid is entitled to that “best price.”  Similarly, the 340B program allows certain health care organizations (such as disproportionate share hospitals) to purchase drugs for their patients at significant discounts.

There’s also a second way in which Medicaid is sometimes able to control its drug expenditures – and it’s directly related to the kind of practice Daraprim’s manufacturer engaged in here.  Specifically, Medicaid is entitled to additional rebates when prices for brand-name drugs increase faster than inflation.  A 5000% increase overnight is just a bit higher than the current inflation rate of 0.2%.  A recent report from the Department of Health and Human Services Office of Inspector General found that this inflation provision was responsible for more than half of Medicaid rebates owed by manufacturers for the brand-name drugs under study.

But here’s the problem: those additional rebates are only charged to brand-name drugs.  That is, manufacturers of generic drugs (which the article suggests Daraprim is) can increase their prices as dramatically as they are able to without facing this particular penalty.  As such, the amount spent by Medicaid on Daraprim will certainly increase, even if the statutory rebates prevent the Medicaid price from increasing to the same level as the prices paid by private insurers or Medicare.

Because Daraprim is not the first recent instance of this phenomenon, bills have already been introduced into both houses of Congress to address this gap in the law (sponsored by Senator and current presidential candidate Bernie Sanders (I-Vt) and Representative Elijah Cummings (D-Md)).  With the current climate of drug prices under a microscope and with the relevant industry group (generic drug companies, rather than innovator companies) unable to make many of the standard arguments in favor of this practice, perhaps these bills may move forward, even in the current legislative climate.

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