As noted in our recent Health Industry Washington Watch blog post, outgoing House Speaker John Boehner and the Obama Administration have reached agreement on a two-year, $80 billion budget/debt-ceiling deal that includes Medicare and Medicaid “offsets” to finance other spending. For manufacturers of generic pharmaceuticals marketed under abbreviated new drug applications, Section 602 of the proposed Bipartisan Budget Act of 2015 (BBA) includes an important proposed change to the Medicaid rebate program with implications for Public Health Service 340B program pricing as well. The ultimate enactment of the proposed BBA is, of course, far from settled.

Historically, the Medicaid rebate statute has required manufacturers to pay fixed “basic” rebates equal to 13% of a generic drug’s average manufacturer price (AMP), while the rebate for brand drugs included a higher basic rebate (23.1% of AMP, or the difference between AMP and best price) and an “additional” rebate designed to recapture increases in brand drug prices since the launch of a drug which exceed the rate of inflation. Under the proposed BBA, Congress would extend the requirement to pay “additional” inflation rebates to generic drugs as well. These changes are in response to recent congressional scrutiny of certain significant generic drug price increases. The rebates would take effect with the first quarterly rebate period that begins one year after enactment of the legislation.

Specifically, for generic drugs first marketed before April 1, 2013, the manufacturer will have to pay a rebate equal to the difference between (i) the product’s current quarter AMP and (ii) the “base period” AMP from the third quarter of 2014 adjusted for inflation. For generic drugs first marketed after April 1, 2013, the calculation is the same except that the “base period” will be deemed to be the fifth full calendar quarter beginning after the date the product is first marketed. .

These potential changes, if enacted, have three potential implications for generic manufacturers. First, from an operational perspective, generic manufacturers will need to update their Medicaid price reporting systems to accommodate inflation-based additional rebates for generic products. Of course, manufacturers may already have work to do in this area if and when the CMS final Medicaid rebate program rule is published. Second, from a financial perspective, the additional rebates have the potential to increase Medicaid rebate liabilities and to decrease 340B program prices for generic products. The actual financial impact is less predictable, however, inasmuch as the price of most generic products typically decreases following launch and generic price increases have typically been limited to situations where a product is sole source, and because generic manufacturers may avoid long term adverse rebate impacts by simply discontinuing production of a product in favor of more profitable products. Third, the statute may raise important strategic pricing questions for new generic launches (e.g., the timing of price changes, discounts, and administration of contractual rights of first refusal during the first five-quarter period which may have the effect of reducing a product’s base period AMP) and market withdrawals.

The House is scheduled to vote on this early this afternoon.