Earlier this week, Senate Budget Committee Ranking Member Bernie Sanders (I-VT) introduced the Medicaid Generic Drug Price Fairness Act, a bill designed to hold down spending on generic drugs in Medicaid. The bill, which has also been introduced in the House by Rep. Elijah Cummings (D-MD), is a reprise of similar legislation introduced in the last Congress.
Skyrocketing Generic Drug Prices
The legislation comes in the wake of a huge jump in generic drug prices in 2014 -- even among certain drugs that have been on the market for a considerable amount of time -- without a clear cause. In some cases, the generic drug is now barely cheaper than the brand-name equivalent that benefited from patent protection. Forbes cites a report showing that several drug groups at least doubled in price and some jumped by much more than that. A few drugs whose prices jumped by an order or two of magnitude drew the particular ire of Sen. Sanders and Rep. Cummings last year.
Some of the price increases are almost certainly the result of raw material shortages or price markups for specific compounds needed in production, but many experts suspect that consolidating market power among generic drug producers and decreasing competition may be playing a significant role. Generic drug-makers, including during testimony at Sen. Sanders' Subcommittee hearing late last year, have generally refused to clarify what the causes have been.
Extending Medicaid Drug Price Controls to Generics
To bring down the price it pays for prescription drugs, Medicaid currently requires two types of rebates from drug manufacturers to make the program's purchases more affordable. The first is a mandated minimum rebate, a 23.1 percent discount from the average manufacturer price for brand-name drugs and a 13.1 percent discount for generic drugs. These rebates are further increased if the manufacturer offers larger discounts to private-sector purchasers.
The second rebate requires an additional discount if a drug's price increases faster than inflation as measured by the CPI-U; however, this rebate only applies to brand-name drugs. The legislation introduced by Sen. Sanders and Rep. Cummings would expand its application to generic drugs as well. According to Sanders' press release, the Congressional Budget Office estimates savings of about $1 billion over ten years (and presumably similar savings for states).
The Value of Controlling Generic Drug Costs
Rising prices for generic drugs can place a strain on the budgets of individuals, businesses, and governments alike. While this bill would only address the costs associated with Medicaid, it could still serve as a valuable tool for state budgets and taxpayers, particularly as Medicaid covers more and more people with the Affordable Care Act's Medicaid expansion and as more states choose to expand Medicaid.
The Centers for Medicare and Medicaid Services projects that as the coverage expansion takes hold, Medicaid prescription drug spending will increase from $21 billion in 2013 to $31 billion in 2016, a 50 percent jump. Although the savings in the bill are relatively modest, the policy takes aim at an important problem for the Medicaid program, that the fast-rising costs are not necessarily the byproduct of increasing input cost. More investigation is also warranted into the causes behind the recent price surges.