Proposed Rule Change Would Make U.S. Healthcare System Even More Complicated and Potentially More Costly

The last thing the U.S. healthcare system needs is more paperwork. Unfortunately, the federal Centers for Medicare & Medicaid Services (CMS) is proposing a policy change that would assign more “busy work” to key players across the health sector.

The proposal specifically targets Medicaid, the government program that provides health care for millions of low-income Americans and people with disabilities.

Back in 1990, Congress passed legislation requiring drug makers to pay rebates to Medicaid in exchange for their medicines being covered by the program. For brand drugs, these rebates are set at either 23.1% of a drug’s average manufacturer price (AMP), or the difference between the AMP and the “best price” available to any public or private entity purchasing the drug.The best price requirement has worked well for over three decades, saving taxpayers money while preserving access for patients in need. Manufacturers, clinics, insurers, pharmacies, and others have grown to rely on it.

Yet, CMS’s proposal would completely upend this system. The agency seeks to redefine a drug’s best price as the net price of the combined total of rebates associated with that drug across the entire pharmaceutical supply chain.

Imagine for a given drug, the manufacturer offers a 30% rebate to private insurers, a 10% rebate to pharmacies, and a 10% rebate to community clinics. Under existing rules, the manufacturer would have to offer the highest discount of the three — 30% — to Medicaid. But under the proposed formula, all of the rebates are added together — resulting in a 50% rebate.

This practice of rebate “stacking” is problematic for a few reasons.

First, it’s impractical. The modern U.S. healthcare system is incredibly complex. To comply with the new rule, entities across the drug supply chain — including wholesalers, distributors, pharmacies, hospitals, clinics, and insurers — would have to create complicated new databases and coordinate with each other to meticulously track drug transactions down to the last cent. This would divert finite resources away from where the focus should be: treating patients.

Second, rebate stacking could indirectly lead to higher costs. If the proposal is finalized, any rebate a manufacturer offers to a public or private entity would factor into Medicaid’s best price calculations. Such a system would encourage drug makers to dole out discounts more sparingly than they currently do.

We all share the goal of reducing costs and improving quality across the healthcare system. But CMS’s proposed overhaul of the best-price requirement would be a step in the opposite direction.