NCPA - National Center for Policy Analysis

Quirky Law Has Some States Paying More For Generic Drugs

February 13, 2002

Many states may not know it, but a peculiar federal law is forcing their Medicaid programs to pay more for some generics than for brand-name drugs.

  • A 1990 federal budget law requires pharmaceutical companies to offer rebates to states in exchange for getting reimbursement from Medicaid.
  • It mandates steeper rebates for brand names -- a minimum of 15.1 percent of the average wholesale price, compared with 11 percent for generics.
  • The discounts on brand-name drugs can be even larger because their rebates must be partly based on the "best price" that manufacturers offer buyers in the private market.
  • If that price is already deeply discounted because of competition, states get bigger rebates -- which can make the net price of some brand-name drugs lower than generics.

In Maine, for example, the antidepressant Luvox is 30 cents to $1.10 cheaper per pill than several generics because of the rebate the state receives from the manufacturer, Solvay SA. According to Arkansas Medicaid director Ray Hanley it's possible for rebates on some brand name drugs to be 40 percent or more.

The price differences can be tough to detect and most states say they don't know how much the discrepancies are costing them.

Some 28 states have laws that make it easier to overlook the cost differences. Such laws require or encourage generics to be used in place of brand-name drugs -- leading some states to switch Medicaid clients to more expensive generics without knowing it.

Source: Andrew Caffrey, "Why Generics Can Cost States More Money," Wall Street Journal, February 13, 2002.


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