Branded pharma companies hit by tweak in Medicaid drug pricing methodology

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Alexander Gaffney Senior Manager, Health Research Institute, PwC US October 04, 2019


Pharmaceutical companies will in some cases be required to pay higher rebates to the Medicaid program following a statutory change signed into law by President Donald Trump late last week.

The change excludes “authorized generics” from the methodology setting Average Manufacturer Prices (AMPs), which is used to calculate the rebates drug companies must pay under the Medicaid Drug Rebate Program. For the category of “innovator” (such as brand-name) drugs in the program, rebates are calculated by taking the greater of either 23.1% of the AMP or the difference between AMP and the best price available for that drug.

Because AMP will be based solely on the price of the innovator drug and not the authorized generic, the percentage-based Medicaid rebate could be higher.

Authorized generics are typically made by the manufacturer of the original drug or an authorized legal subsidiary or entity, and are marketed under the same marketing application as the original drug. The drug is identical to the original in terms of form and substance but is generally marketed under a different name and at a lower price.

HRI impact analysis

The change could affect a substantial number of branded pharmaceutical companies. According to the FDA, as of Sept. 30, there were 1,215 authorized generic drugs. Two caveats: The FDA list includes many dosage forms for the same drug, and companies may not be marketing all of the products on the list.

Authorized generics are typically used when the innovator drug is expensive, so changes in the rebate amounts could be substantial. The amount of savings will depend on the price difference between the innovator drug and the authorized generic.

The legislative language calls for the change to take effect the first fiscal quarter after the date of enactment. Because the law was signed on Sept. 27, the new pricing methodology took effect on Oct. 1, requiring prompt action by company pricing teams.

Drugmakers might facilitate the use of an authorized generic for many reasons. They may wish to use an authorized generic to sell their drugs at lower prices to state Medicaid programs, avoiding the need to renegotiate contracts if they ever wish to change their pricing and reducing the rebates the companies would be required to pay.

Companies may also use authorized generics to undercut potential generic competition by capturing some of the market share that generics might otherwise take from them. They may also allow their use to settle litigation, such as to preserve patent rights while allowing a generic entrant onto the market on a specific date.

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Trine K. Tsouderos

HRI Regulatory Center Leader, PwC US

Tel: +1 (312) 241 3824

Alexander Gaffney

Senior Manager, Health Research Institute, PwC US

Tel: +1 (202) 836 1604

Crystal Yednak

Senior Manager, Health Research Institute, PwC US

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