Background

Since 2010, a rebate cap has been in place that prevents state Medicaid programs from receiving rebate payments that exceed the Average Manufacturer Price (AMP) of a product. However, provisions in the American Rescue Plan Act of 2021 will remove this cap, effective January 1, 2024.¹

Without the AMP rebate cap in place, states may benefit from higher rebate payments that are greater than the sale price of the drug, which, absent other changes, could result in substantial savings to Medicaid programs. States should be aware of changes to the prescription drug market such as list price reductions, product discontinuations, the launch of new generics, or changes that impact components of the Medicaid unit rebate amount (URA) calculation. While not necessarily a direct correlation to the AMP cap removal, some products have already experienced list price reductions (e.g., insulin products) or have been discontinued. The AMP cap removal is straightforward at the surface, but the different paths for downstream effects must be accounted for to manage expenditures and maintain patient access to medications.

With different considerations for state Medicaid programs and pharmacy products, a more granular evaluation process is needed to describe consistent macro and product-specific impacts. Below, we outline immediate steps to ensure that pharmacy programs have the necessary monitoring and reporting to identify risk and manage implications for their programs.

More details of the AMP, URA, and Medicaid Drug Rebate Program (MDRP) program dynamics, including example calculations, are provided in Appendix A.

What can state Medicaid programs do to ensure readiness in a post-AMP cap era?

1. Evaluate gross and net price reporting structures

• Identify how potential pharmacy product strategies resulting from the AMP cap removal would manifest in pharmacy data sources:
1. List price reductions
2. AMP and URA changes
3. New authorized generics or Abbreviated New Drug Application (ANDA) products
4. Product discontinuations, particularly for brand products, such as those listed on the U.S. Food and Drug Administration (FDA) website²
5. MDRP participation changes
• Develop monitoring reports to meet need:
1. Establish automated processes to identify material changes in list price, AMP, URA, new generic launches, product discontinuations, and MDRP participation changes.
2. Develop a watch list and identifier in monitoring reports for products at a greater risk of change due to the AMP cap removal such as “penny priced” drugs.
• Penny-priced drugs have a net cost to the state of $0.01/unit; this occurs when the AMP minus the URA is $0.01. Based on a recent publication from IQVIA, approximately 15% to 20% of brand drugs are capped at the AMP³, which highlights the significant number of medications that may be impacted due to the AMP cap removal.

2. Establish your preferred drug list (PDL) management approach to address the AMP cap removal

• Review PDL management policies and procedures
1. Evaluate the need to modify standard operating procedures (SOPs) for the communication cascade between pharmacy cost reporting, the drug utilization review (DUR) board, and the pharmacy and therapeutic (P&T) committee.
2. Prepare your DUR board and P&T committee for discussions around potential disruption driven by cost, if appropriate.
3. Evaluate frequency and flexibility with earlier timing of routine therapeutic class reviews that could lead to savings or mitigate net cost increases.
• Evaluate gross and net cost financial reports:
1. Consider the frequency of gross and financial report review to align with a potentially more volatile pricing environment.
2. Consider and evaluate brand over generic strategies.
3. Evaluate the need for inclusion of additional therapeutic classes for PDL management.
• Evaluate supplemental rebate contracts:
1. Review preferred product mix within therapeutic classes, giving consideration to clinical aspects regarding safety and efficacy and changes in net costs. If preferred product changes are warranted, consider the impact on supplemental rebate contracts, patient medication access, and prescription changes of off-cycle changes. While drugs that have a total rebate amount that currently exceeds the AMP cap may not have supplemental rebate agreements due to the federal statutory rebate requirement, there may be new opportunities for supplemental rebate agreements for products with a price reduction and/or for other products in the therapeutic class.

3. Consider managed care capitation rates

• Evaluate the impact to capitation rates resulting from the AMP cap removal such as:
1. List price changes that impact the gross drug costs utilized in capitation rate development
2. Market availability of products such as drug shortages or brands and generics entering or leaving the market influencing drug mix and impacting gross costs
3. Changes to a uniform or universal PDL and managed care formularies impacting drug mix and gross costs

4. Map and model other downstream impacts of the AMP cap removal

• Gross or net price changes may impact 340B covered entities (CEs):
1. Consider impacts to 340B CEs’ margin and state expenditures due to the AMP cap removal for covered outpatient drugs as changes to the URA can impact the 340B ceiling price (CP) and/or 340B actual acquisition costs (AACs).
2. Consider review of 340B reimbursement methodologies.
3. See Appendix B for more details on the impact to 340B.
• Changes to drug pricing strategies:
1. Monitor changes to net trends due to lower price increases over time as compared to historical pricing strategies, reducing inflationary rebates.
2. Consider the potential for higher drug launch prices to reduce the need for future price increases.

In summary

Effective January 1, 2024, Medicaid statutory rebates will no longer be capped at 100% of AMP. This change, absent any other market changes, has the potential to increase manufacturer rebates paid to state Medicaid programs. However, impacts to gross costs, such as announced list price decreases and changes to net costs, may decrease overall total rebates of some drugs to state Medicaid programs. In summary, due to the potential of varying influences discussed in this paper, states should continue to monitor their pharmacy programs and PDL management at the gross and net cost levels and consider downstream effects of the AMP cap removal legislation, such as 340B reimbursement and managed care capitation payments.

Download the full report including appendices

¹ CMS (June 3, 2021). Medicaid, Children’s Health Insurance Program (CHIP), and Basic Health Program (BHP) Related Provisions in the American Rescue Plan Act of 2021. Retrieved November 14, 2023, from https://www.medicaid.gov/sites/default/files/2021-11/cib060321.pdf.

² FDA. FDA Drug Shortages. Retrieved November 14, 2023, from https://www.accessdata.fda.gov/scripts/drugshortages/.

³ IQVIA (April 24, 2023). The Impact of AMP Cap Removal on Medicaid Drug Prices. Retrieved November 14, 2023, from https://www.iqvia.com/locations/united-states/blogs/2023/04/the-impact-of-amp-cap-removal-on-medicaid-drug-prices.