The recent controversial Food and Drug Administration (FDA) approval of Aduhelm, a drug to treat Alzheimer’s disease, has brought renewed attention to the issue of Medicaid prescription drug spending for so-called accelerated-approval drugs. Under section 506(c) of the Federal Food, Drug and Cosmetic Act, the FDA can grant faster approval for new drugs based on “surrogate endpoints” that are reasonably likely to predict clinical benefits when those benefits themselves have not yet been demonstrated. In the case of Aduhelm, the surrogate endpoint is the reduction of amyloid beta plaque, which builds up in the brains of Alzheimer’s patients.

As the Medicaid and CHIP Payment and Access Commission (MACPAC) reports, states have expressed significant concerns about having to continue to cover accelerated-approval drugs with high list prices before manufacturers have shown a verified clinical benefit. To address these concerns, MACPAC recommended in its June report to Congress that manufacturers temporarily pay higher rebates (additional discounts) to state Medicaid programs for such drugs until the drug’s clinical benefit has been proven and traditional approval has been granted by the FDA.

Under the Medicaid Drug Rebate Program, drug manufacturers must provide significant rebates to the federal government and states as a condition of having their drugs covered by Medicaid. There are two types of rebates required. First, manufacturers pay a basic rebate. For brand-name drugs, this is the greater of a minimum rebate equal to 23.1 percent of the average price paid by wholesalers for drugs distributed to retail pharmacies or the largest discount provided to most other private purchasers. Second, manufacturers must pay an additional rebate if their prices rise faster than general inflation. States and Medicaid managed care plans also may negotiate voluntary rebates on top of these federally required rebates.

Under the MACPAC recommendations, manufacturers of accelerated-approval drugs would be required to pay a higher minimum rebate and a larger inflation-related rebate than what is currently required under federal law. MACPAC, however, did not specify how much these rebates should be increased. These higher rebates would remain in place until manufacturers have completed confirmatory clinical trials and received traditional approval from the FDA. MACPAC’s recommendations are sound for the following reasons:

  • Lower net Medicaid costs for these drugs. According to MACPAC, informal estimates from the Congressional Budget Office (CBO) indicate that a 10 percentage-point increase in the minimum rebate and a 20 percent increase in the inflationary rebate for accelerated-approval drugs, if confirmatory trials have not been completed after five years, would produce federal Medicaid savings of up to $1 billion over five years, compared to what the federal government would otherwise spend on these drugs in Medicaid. Based largely on the current federal and state share of Medicaid drug rebates, that translates to roughly $500 million in state savings over five years.
  • Create stronger incentives for manufacturers to complete confirmatory trials. The accelerated-approval pathway has a vital purpose: to allow faster access to new drugs for people with serious health conditions. But some drug manufacturers never complete required postmarket confirmatory trials or do so only after long delays. This makes it difficult to comprehensively assess the drugs’ clinical benefits. Requiring an increased minimum rebate and higher inflation-related rebate would create more robust financial incentives for drug manufacturers to complete their confirmatory trials.
  • Preserve beneficiary access. Under the Medicaid rebate program, to ensure beneficiary access, state Medicaid programs must cover nearly all FDA-approved drugs, including those under the accelerated-approval pathway. However, in recent years, to reduce costs, some states have sought waivers to impose closed drug formularies that exclude coverage of certain drugs. For example, Tennessee received CMS approval in January to impose a closed formulary for most drugs as part of a broader controversial waiver converting its federal Medicaid funding to a block grant. This approach raises serious concerns because it would likely significantly reduce low-income beneficiaries’ access to needed prescription drugs and lead to poorer health outcomes. In contrast, the two MACPAC recommendations retain the existing beneficiary coverage protection and continue to require state Medicaid programs to cover accelerated-approval drugs.
  • Build on the successful Medicaid Drug Rebate Program. The Medicaid rebate program is highly effective at substantially lowering Medicaid’s prescription drug costs. For example, a recent groundbreaking CBO study found that, compared to other federal programs and agencies, Medicaid obtained the lowest prices (net of rebates and discounts) for the top-selling and highest-cost Medicare Part D drugs. Medicaid’s net prices were even lower than those in the Department of Veterans Affairs’ Prime Vendor program, which negotiates on behalf of the VA health system and is widely touted as achieving the lowest drug prices. Notably, Medicaid was able to achieve these large savings while maintaining beneficiary access to needed prescription drugs through its open formulary requirement. Further improvements and expansions to the rebate program, like the two MACPAC recommendations related to accelerated-approval drugs, are the best approach to helping state Medicaid programs better address rising drug costs.

As Congress and the Biden administration consider major drug-pricing reforms as part of a reconciliation bill expected to move this fall, they could include the sound MACPAC recommendations that help address rising Medicaid drug costs and encourage manufacturers of accelerated-approval drugs to complete their postmarket confirmatory clinical trials.