The Medicaid Prescription Drug Rebate Program (MDRP) requires a manufacturer who wants its drug covered under Medicaid to enter into a rebate agreement with the Secretary of Health and Human Services stating that it will rebate a specified portion of the Medicaid payment for the drug to the states, who in turn share the rebates with the federal government. In exchange for manufacturer participation, Medicaid programs cover nearly all of their FDA-approved drugs.

MDRP was created in 1990 by the Omnibus Reconciliation Act (OBRA 90). The Affordable Care Act (ACA) increased the rebate amount for both brand drugs and generic drugs. The ACA also extended rebates to outpatient drugs purchased for beneficiaries covered by Medicaid managed care organizations (MCOs).

MDRP was created as a tool to combat rising drug prices and Medicaid spending. In line with said tenet, the MDRP also requires manufacturers to enter into agreements with other federal programs that serve vulnerable populations (e.g. 340B).

23.1% of Average Manufacturer Price (AMP) or the difference between AMP and “best price,” whichever is greater. Certain pediatric and clotting drugs have a lower rebate amount of 17.1%. Best price is defined as the lowest available price to any wholesaler, retailer, or provider, excluding certain government programs, such as the health program for veterans. AMP is the average price paid to drug manufacturers by wholesalers and retail pharmacies. For generic drugs, the rebate amount is 13% of AMP, and there is no best price provision. The specific rebate on a given drug is considered proprietary. To comply with MDRP, manufacturers must report drug pricing information to the government. HHS uses the price data to calculate each drug’s per-unit Medicaid rebate, known as a unit rebate amount (URA). A drug’s URA is determined by a formula that calculates the “basic” rebate and then adds an additional inflation-based rebate amount. States then multiply the number of units of a drug they purchase by the drug’s URA to determine the rebates a manufacturer owes them. In addition to federal statutory rebates, most states negotiate with manufacturers for supplemental rebates. These supplemental rebates are not subject to the best price floor. States often use placement on a preferred drug list (PDL) as leverage to negotiate supplemental rebates with manufacturers. States encourage providers to prescribe drugs on the PDL over other drugs and create incentives for them to do so if possible.¹

In 2017, Medicaid spent $64 billion on drugs and received nearly $35 billion in rebates.

As of June 2019, 47 states and DC had supplemental rebate agreements in place.¹

MDRP rebates may discourage manufacturers from offering deeper discounts to private purchasers, limiting potential cost savings for millions of patients covered by their employers or private health plans. The Government Accountability Office found that several years after Congress enacted OBRA 90, average best prices increased, resulting in the best price calculations for many drugs falling to about the level of the minimum rebate amount of 23.1% of AMP.²

1. Dolan R. Understanding the Medicaid Prescription Drug Rebate Program. KFF. https://www.kff.org/medicaid/issue-brief/understanding-the-medicaid-prescription-drug-rebate-program/. Published 2019.

2. The Medicaid Drug Rebate Program And The Impact Of “Best Price” Rules. Institute for Health Policy; 2020. https://www.kpihp.org/wp-content/uploads/2020/10/Best_Price_101.pdf.