Medicaid Rebates and the Impact of Authorized Generics

Excluding Authorized Generics from Brand Drug AMP Calculations

The Office of Inspector General (OIG) published a review in April 2019 assessing how excluding authorized generics from average manufacturer price (AMP) calculations would impact Medicaid drug rebates. This review was prompted by a 2017 HHS Budget Brief, which stated that excluding authorized generics could save Medicaid about $20 million per year. Through this review, the OIG found that actual savings were about 30 times this prediction.

Under the Affordable Care Act (ACA), the sales of an authorized generic drug from the brand manufacturer to a secondary manufacturer (i.e., the generic labeler or distributor) were explicitly allowed in AMP calculation only after the implementation of the statutory definition of “wholesaler.” Under the rule, the sale of AGs to secondary manufacturers should be included in AMP, if the secondary manufacturer is “acting as a wholesaler for drugs distributed to retail community pharmacies.”    This had a huge impact on Medicaid drug rebate amounts because the resulting smaller AMP reduced the rebates paid to Medicaid.

The OIG reviewed nine brand name drugs that included authorized generic drugs to secondary manufacturers in their AMP calculations. The manufacturers of these nine brand name drugs transferred the authorized generic to a secondary manufacturer and included the transfer price of the authorized generic in the AMP calculation of the brand name drug.  After the manufacturers provided AMP data for each drug, OIG verified the data, removed the authorized generic transactions, and then recalculated the AMP.  The OIG analysis concluded that if Medicaid had calculated AMP excluding authorized generics to secondary manufacturers, Medicaid would have received 46% more in rebates for these nine brand name drugs, amounting to $595 million for the calendar year 2017.

The OIG recommends that the CMS seek legislative change to exclude authorized generic drug transactions to secondary manufacturers from the AMP calculation of the brand name drug, as this was shown to increase manufacturer Medicaid rebate obligations.  CMS agreed with the OIG recommendation; the President’s Fiscal Year 2020 Budget includes a legislative proposal to clarify authorized generic drug sales under the Medicaid Drug Rebate Program.

To read the full OIG review, visit https://oig.hhs.gov/oas/reports/region6/61804002.pdf.

 

Posted June 2019

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