What price does Medicaid pay for drugs? The answer is, the “best price”. What is “best price?”
The 1990 Omnibus Reconciliation Act (OBRA) codified that pharmaceutical manufacturers must give Medicaid steep discounts in order to receive coverage by state Medicaid agency. How big are the discounts? The answer is the larger of a fixed percentage of the average manufactuerers price (AMP) or the difference between the “best price” and AMP. The best price is defined as the is the lowest manufacturer price paid for a drug by any purchaser (defined by the Medicaid statute as “any wholesaler, retailer, provider, health maintenance organization (HMO), or nonprofit or government entity…).” Some payers–such as the VA, Department of Defense, and Indian Health Service–are exempted from the list of entities considered in the best price calculation.
Best price sounds like a good idea. It lowers the price of drugs for people who need it most. But is it really?
One drawback is that it limits the price discounts that can be paid to large commercial insurers. This may be less of an issue if society feels that Medicaid should get the best deal.
However, it also limits the ability for drug manufacturers to engage in risk sharing agreements and other creative contacting forms. For instance, drug manufactures may want to charge a high price for patients who derive significant benefits from a drug and a lower price for those who receive moderate benefits. Selling a drug at a lower price for a specific subpopulation in the private market, however, could trigger the “best price” provision which would lower the drug price received by all Medicaid patients, even if they were in the group that highlight benefited from the treatment. Additionally, creative risk sharing contracts where drug manufacturers contract based on health outcomes become increasingly risky if poor performance for patients at a single payer could result in a low best price for all Medicaid patients.
Thus, what was motivated by good intentions–provide Medicaid patients with lower cost, affordable medications–has a number of unintended consequences.