OIG: Soaring Medicaid Brand-name Drug Prices Offset by Rebates

The costs of Medicaid's brand-name drugs grew at about three times the rate of inflation from 2005-2010, but that increase was offset by rebates to state programs, a federal audit shows.

The report from the Department of Health and Human Services Office of Inspector General found that brand-name drug payments by state Medicaid programs grew between 34% and 40% for the five year period, while overall inflation grew only 13%.

"For the 50 Medicaid brand-name drugs with the highest expenditures, total median increases in prices and payment amounts not only outpaced the inflation rate, but also outpaced total median increases in prices and payment amounts for brand-name drugs as a whole," the audit said.  

However, the audit also found that when drug manufacturers' rebates to state Medicaid programs were taken into account, "the per-unit net cost to Medicaid increased at a much lower rate than other points of comparison between 2005 and 2009 (rebate data were not available for 2010).

"In fact, Medicaid's rebate-adjusted payment amounts for brand-name drugs actually declined at the median in 3 of 4 years, lagging behind the inflation rate," the audit said.

The OIG study had been requested by U.S. Sen. Bill Nelson (D-FL) after AARP published its own study last summer showing a significant increase in the cost of brand-name prescription drugs since 2002.  

The OIG study looked beyond the reported increases in published prices – which do not often represent the actual price that is paid -- and examined changes in transaction-based prices, and the financial effect of price changes on Medicaid.

Since 2006, Medicaid payments for prescription drugs have remained relatively steady. In 2009, Medicaid drug expenditures totaled approximately $26 billion (not including rebates). Brand-name drugs generally account for about 80% of the total dollars reimbursed.  However, Medicaid recouped approximately one-third of its costs for prescription drugs between 2006 and 2009, an average annual savings of about $8 billion, OIG said.

Drug makers pay higher rebates for brand-name drugs than for generic drugs. From 1996 to 2009, the unit rebate amount (URA) for a generic drug was 11% of the wholesale price and the basic URA for a brand-name drug was the around 15%, OIG said.