Review of Additional Rebates for Brand-Name Drugs With Multiple Versions

Our review found that of the top 150 brand-name drugs for calendar year 2007 ranked by Medicaid reimbursement, 114 had more than one version. For 65 of the 114, the prices of the earliest versions of the drugs exceeded their inflation-adjusted prices when the new versions entered the market. We calculated that for calendar years 1993 through 2007, States could have collected approximately $2.5 billion in additional rebates for the 65 brand-name drugs if the baseline average manufacturer prices (AMP) of the new versions had been adjusted (i.e., reduced) to reflect price increases in excess of inflation for the earliest versions.

For a manufacturer's covered outpatient drug to be eligible for Federal Medicaid funding, the manufacturer must enter into a rebate agreement that is administered by CMS and pay quarterly rebates to the States. Federal law requires manufacturers to pay an additional rebate when the AMP for a brand-name drug increases more than inflation.

We did not evaluate the drug manufacturers' bases for developing the new versions of existing drugs identified in our review. Because the Medicaid drug rebate program calculates rebates separately for each version of a drug, manufacturers could develop new versions of existing brand-name drugs solely to avoid paying additional rebates when they substantially increase prices. Without some modification to the rebate law, the risk of manufacturers taking advantage of this potential loophole may increase over time.

We recommended that CMS continue to seek legislative authority to modify the present rebate formula calculation to ensure that manufacturers cannot circumvent paying additional rebates by bringing new versions of existing brand-name drugs to market. CMS concurred with our findings and recommendation.