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Press Release

Medicaid: Bigger Generic Drug Rebates May Not Help Contain Costs

November 15, 2005

The U.S. Senate
Washington, D.C.

Dear Senator,

On behalf of the 700,000 members of FreedomWorks, I urge Congress to carefully weigh the effects of raising Medicaid rebates on generic drugs. One issue under consideration is increasing the current rebate from 11 percent to 17 percent— a jump of more than 50 percent. While it is important to establish measures to contain the costs of Medicaid expenditures, it is necessary to examine the potential unintended consequences of changes in the rebate. In particular, excessive rebates may force some generic manufacturers out of the market, leaving taxpayers to cover the higher costs of brand name prescriptions. Rather than establishing artificial constraints on pricing flexibility, it may be more warranted to pursue more fundamental reforms of Medicaid in pursuit of a market-based health care system.

Prescription drugs play an important role in the delivery of health care and are a rapidly increasing component of Medicaid expenditures. As the Congressional Budget Office noted, federal fee-for-service drug expenditures under Medicaid have been increasing at more than 15 percent annually. In 2004, combined federal and state drug expenditures totaled more than $30 billion. Overall, Medicaid is one of the largest expenditures by state governments, and the increasing role of prescription drugs in health care delivery suggests that concerns over the costs of the program are warranted.

However, increasing the rebate on generic drugs may not ultimately contain costs. Generic brands, which offer low-cost alternatives to brand name pharmaceuticals, face more intense competition and operate at thinner margins. Increasing the rebate that these companies must provide state governments could have the effect of reducing the number of participating prescription drug manufacturers. Should generic providers no longer find it feasible to participate in the market, the remaining alternative may be more costly brand-name drugs, leaving states and taxpayers facing higher costs.

These results are not simply theoretical. States that have sought supplemental rebates found themselves facing a reduced number of manufacturers as generics left the market.

Medicaid is in need of fundamental reform, and simply increasing rebates ignores the more significant problems with the program. The program has become an increasingly costly way to deliver health care, with few incentives to promote competition or control prices. Among other things, Medicaid reform should encourage increased usage of low cost generic alternatives. Establishing new mandated rebates for prescription drugs is a veiled attempt at price controls that hampers rather than promotes market-based reforms for Medicaid. Indeed, Congress rejected this approach in the Medicare prescription drug bill and should be wary of applying such policies when attempting to reform Medicaid. This is particularly true when there is, in fact, vigorous market competition for generic drugs. Should rebates hamper the degree of competition and reduce the number of participating manufacturers, it is not evident that such an approach would generate real savings for the states or the federal government.

Given these concerns, FreedomWorks encourages Congress to examine meaningful reform of Medicaid rather than attempting to resolve more elemental problems through larger generic rebates


Matt Kibbe