Fixing the Misguided Medicaid Generics Penalty

The 2015 Bipartisan Budget Act improperly applied a brand drug rebate inflation penalty to generic drugs, known as the Medicaid Generics Penalty, despite significant market differences between the brand and generic pharmaceutical markets. As a result, this penalty unintentionally jeopardizes access to affordable medicines for patients across the country and destabilizes the generic drug market.

The penalty was originally established to control price increases for branded medications when they had market exclusivity and could drastically increase list prices year over year. However, the generic market functions very differently – as more generic competitors enter the market, prices fall, often as low as 80% below the brand price. So while this penalty may be appropriate for brand and specialty drugs, many of which have seen historically high price inflation (an annual average increase of roughly 15% during the last several years), it threatens patient access to medicines when applied to generic medicines.

With this penalty in place, even the most minor fluctuations in the price of a generic drug can trigger a penalty. The top 100 Part D generic drugs are priced on average at 10 cents per dose. A simple increase by 1 cent to 11 cents per dose would exceed inflation and trigger the penalty. Conversely, the top 200 brand drugs have an annual average cost of more than $5,800, where an increase of $100 would not trigger a penalty. Further, in many situations, generic manufacturers are now paying penalties in situations that are often outside of their control due to how the penalty is calculated, including when a drug’s price did not increase or even decreased. Many of these low-cost generics are among the most vulnerable to drug shortages.

An analysis conducted by Bates White found that:


By decreasing the expected returns from supplying the Medicaid market, the associated risks and opportunity costs may be high enough to deter manufacturers from entering the market. This policy exacerbates the risk of shortages and offers little benefit in terms of reducing public spending.


Bates White

Recent empirical analysis by Charles River Associates linked application of the penalty ANDA discontinuations and drug shortages, finding:


The Medicaid CPI Rebate, which is intended to prevent price spikes in pharmaceutical markets, may be affecting generic markets in ways that exacerbate the pressures on generic manufacturers that can lead to instability.


Charles River Associates